Kemper’s subsidiaries together own and occupy 13 buildings located in seven states consisting of approximately 49,000 square feet in the aggregate. Kemper’s subsidiaries hold additional properties that are not occupied by Kemper or its subsidiaries solely for investment purposes.
The Company leases five floors, or approximately 67,000 square feet, in a 41-story office building in Chicago for its corporate headquarters and Property & Casualty Insurance segment’s headquarters. The lease expires in September 2023. Kemper’s Property & Casualty Insurance segment leases facilities with an aggregate square footage of approximately 413,000 at 10 locations in eight states. The latest expiration date of the existing leases is in September 2023. Kemper’s Life & Health Insurance segment leases facilities with aggregate square footage of approximately 460,000 at 127 locations in 27 states. The latest expiration date of the existing leases is in January 2025. Kemper’s corporate data processing operation leases facilities with aggregate square footage of approximately 36,000 square feet at two locations in two states. The latest expiration date of the existing leases is in December 2018.
Selected financial information as of and for the years ended December 31, 2014, 2013, 2012, 2011 and 2010 is presented below.
Net Income was $114.5 million ($2.12 per unrestricted common share) for the year ended December 31, 2014, compared to $217.7 million ($3.81 per unrestricted common share) for the year ended December 31, 2013. Income from Continuing Operations was $112.6 million ($2.08 per unrestricted common share) in 2014, compared to $214.5 million ($3.75 per unrestricted common share) in 2013.
Net Investment Income decreased by $5.6 million in 2014 due primarily to $17.4 million in lower net investment income from Equity Method Limited Liability Investments and $8.1 million of lower net investment income from Interest and Dividends on Fixed Maturities, partially offset by $21.9 million of higher net investment income from Dividends on Equity Securities.
See the “Reinsurance” subsections of the “Property and Casualty Insurance Business” and “Life and Health Insurance Business” sections of Item 1(c), “Description of Business,” and Note 19, “Catastrophe Reinsurance,” to the Consolidated Financial Statements for additional information on the Company’s reinsurance programs.
See MD&A, “Property & Casualty Insurance,” MD&A, “Life & Health Insurance,” and Note 5, “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 2014 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.
The following discussion for the Property & Casualty Insurance segment uses 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 (including write-offs of long-lived assets) 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 (including write-offs of long-lived assets) Ratio. The Company believes Underlying Losses and LAE and the Underlying Combined Ratio are useful to investors and are used by management to reveal the trends in the Company’s Property & Casualty Insurance business that may be obscured 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 periods, it has no bearing on the performance of the Company’s insurance products 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.
Consolidated Net Operating Income is an after-tax, non-GAAP 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 and 3) 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.
Selected financial information for the Property & Casualty Insurance segment follows:
Earned Premiums in the Property & Casualty Insurance segment decreased by $143.4 million, as lower volume accounted for a decrease of $211.4 million, while higher average premium accounted for an increase of $68.0 million. The lower volume was driven primarily by personal automobile insurance and homeowners insurance, which had volume decreases of $167.6 million and $39.8 million, respectively. The increase in average premium was also driven primarily by personal automobile insurance
The Property & Casualty Insurance segment reported Segment Net Operating Income of $100.6 million for the year ended December 31, 2013, compared to Segment Net Operating Loss of $10.9 million in 2012. Segment net operating results improved by $111.5 million due primarily to lower incurred catastrophe losses and LAE (excluding reserve development), lower underlying losses and LAE as a percentage of earned premiums, a higher level of favorable loss and LAE reserve development and higher net investment income. Underlying losses and LAE as a percentage of earned premiums were 70.4% in 2013, a decrease of 4.2% percentage points compared to 2012, as personal automobile insurance, homeowners insurance and other personal insurance improved, while commercial automobile insurance deteriorated. Catastrophe losses and LAE (excluding reserve development) were $47.1 million in 2013, compared to $118.5 million in 2012, which was a decrease of $71.4 million. See MD&A, “Catastrophes,” beginning on page 28 for more information on catastrophic events and catastrophe losses and LAE. Favorable loss and LAE reserve development (including catastrophe reserve development) was $58.0 million in 2013, compared to $24.9 million in 2012. Insurance expenses decreased by $17.1 million in 2013 compared to 2012 but were
fairly flat as a percentage of earned premiums. The Property & Casualty Insurance segment’s effective income tax rate differs from the federal statutory income tax rate due primarily to tax-exempt investment income and dividends received deductions. Tax-exempt investment income and dividends received deductions were $27.1 million in 2013, compared to $34.9 million in 2012.
Favorable loss and LAE reserve development was $30.1 million in 2013, compared to adverse loss and LAE reserve development of $2.1 million in 2012.
Earned premiums in homeowners insurance decreased by $13.8 million as lower volume accounted for a decrease of $39.8 million, while higher average premium accounted for an increase of $26.0 million. Incurred losses and LAE were $222.5 million, or 71.2% of earned premiums, in 2014, compared to $188.5 million, or 57.8% of earned premiums, in 2013. Incurred losses and LAE as a percentage of earned premiums increased due to higher incurred catastrophe losses and LAE (excluding reserve development) and a lower level of favorable loss and LAE reserve development, partially offset by lower underlying losses and LAE as a percentage of earned premiums. Underlying losses and LAE as a percentage of earned premiums were 50.1% in 2014, compared to 52.2% in 2013, which is an improvement of 2.1 percentage points due primarily to the impact of pricing and underwriting actions taken by the Company, partially offset by higher frequency of claims and higher severity of losses. Catastrophe losses and LAE (excluding reserve development) were $80.8 million in 2014, compared to $38.2 million in 2013. Favorable loss and LAE reserve development was $14.8 million in 2014, compared to $20.1 million in 2013.
Earned premiums in commercial automobile insurance increased by $2.5 million due to higher volume with average premium remaining consistent. Incurred losses and LAE were $42.2 million, or 77.0% of earned premiums, in 2014, compared to $40.8 million, or 78.0% of earned premiums, in 2013. Incurred losses and LAE as a percentage of earned premiums decreased due to lower underlying losses and LAE as a percentage of earned premiums, partially offset by a lower level of favorable loss and LAE reserve development. Underlying losses and LAE as a percentage of earned premiums were 81.3% in 2014, compared to 83.5% in 2013, which is an improvement of 2.2 percentage points due primarily to lower severity of losses across most coverages, partially offset by higher frequency of claims across most coverages. Favorable loss and LAE reserve development was $2.6 million in 2014, compared to $3.0 million in 2013.
Earned premiums in commercial automobile insurance increased by $8.8 million as higher volume accounted for an increase of $8.2 million, while higher average premium accounted for an increase of $0.6 million. Incurred losses and LAE were $40.8 million, or 78.0% of earned premiums, in 2013, compared to $22.9 million, or 52.6% of earned premiums, in 2012. Incurred losses and LAE as a percentage of earned premiums increased due primarily to a lower level of favorable 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 83.5% in 2013, compared to 81.4% in 2012, which is an increase of 2.1 percentage points due primarily to higher severity of losses and, to a lesser extent, higher frequency of claims, partially offset by the positive impact of rate actions taken by the Company on average premium. Favorable loss and LAE reserve development was $3.0 million in 2013, compared to $12.6 million in 2012.
Other personal insurance products include umbrella, dwelling fire, inland marine, earthquake, boatowners and other liability coverages. Selected financial information for other personal insurance product lines follows.
Earned premiums in other personal insurance decreased by $4.4 million as lower volume accounted for a decrease of $6.6 million, while higher average premium accounted for an increase of $2.2 million. Incurred losses and LAE were $25.5 million, or 50.1% of earned premiums, in 2014, compared to $20.8 million, or 37.6% of earned premiums, in 2013. Incurred losses and LAE as a percentage of earned premiums increased due to higher underlying losses and LAE as a percentage of earned premiums and higher catastrophe losses and LAE (excluding reserve development), partially offset by a higher level of favorable loss and LAE reserve development. Underlying losses and LAE as a percentage of earned premiums were 55.2% in 2014, compared to 44.1% in 2013, which is an increase of 11.1 percentage points due primarily to higher severity of losses and frequency of claims across most coverages. Catastrophe losses and LAE (excluding reserve development) were $2.8 million in 2014, compared to $1.2 million in 2013. Favorable loss and LAE reserve development was $5.4 million in 2014, compared to $4.8 million in 2013.
Earned premiums in other personal insurance decreased by $0.3 million as lower volume accounted for a decrease of $2.4 million, while higher average premium accounted for an increase of $2.1 million. Incurred losses and LAE were $20.8 million, or 37.6% of earned premiums, in 2013, compared to $30.8 million, or 55.4% of earned premiums, in 2012. Incurred losses and LAE as a percentage of earned premiums decreased due to lower underlying losses and LAE as a percentage of earned premiums, lower catastrophe losses and LAE (excluding reserve development) and a higher level of favorable loss and LAE reserve development. Underlying losses and LAE as a percentage of earned premiums were 44.1% in 2013, compared to 51.4% in 2012, which is a decrease of 7.3 percentage points due primarily to lower frequency of umbrella liability insurance claims, lower severity of losses in other insurance lines (excluding umbrella liability) and higher average premium, partially offset by higher severity of umbrella liability insurance losses. Catastrophe losses and LAE (excluding reserve development) were $1.2 million in 2013, compared to $4.9 million in 2012. Favorable loss and LAE reserve development was $4.8 million in 2013, compared to $2.7 million in 2012.
Selected financial information for the Life & Health Insurance segment follows:
Earned Premiums in the Life & Health Insurance segment decreased by $20.2 million for the year ended December 31, 2014, compared to 2013. Earned premiums on life insurance decreased by $5.1 million in 2014, compared to 2013, due primarily to a lower volume of insurance, as a decrease of $12.6 million from life insurance products offered by the Kemper Home Service Companies (“KHSC”) was partially offset by an increase of $7.5 million from life insurance products offered by Reserve National. In late 2012, Reserve National began offering its life insurance products through an expanded network of brokers and non-exclusive independent agents (See Item 1A., “Risk Factors” under the title “Reserve National’s operating history with its expanded distribution channels and new products is limited.”) Earned premiums on accident and health insurance decreased by $12.8 million in 2014, compared to 2013, due primarily to lower volume of insurance resulting primarily from the run-off of certain health insurance products largely due to the impact of the Health Care Acts, partially offset by higher volume of supplemental health insurance products. Some of the health insurance products previously sold by Reserve National have been adversely impacted by provisions of the Health Care Acts. In particular, provisions, effective in 2014, prohibiting the renewal of certain policies issued by Reserve National after the issuance of the Health Care Acts and also establishing health insurance exchanges, and a provision which sets minimum loss ratios for health insurance policies have adversely impacted Reserve National’s business. Such affected health insurance products (the “HCA Affected Products”) accounted for $30.8 million, or 21%, of the Life & Health Insurance segment’s accident and health insurance earned premiums in 2014 and $49.6 million, or 31%, of the Life & Health Insurance segment’s accident and health insurance earned premiums in 2013. Reserve National has adapted its business model in response to the Health Care Acts and ceased selling HCA Affected Products at the end of 2011 and transitioned its sales to supplemental health insurance products that are not expected to be as severely impacted by the Health Care Acts. Reserve National expects earned premiums from HCA Affected Products to decrease by approximately 50% in 2015 and expects an increase in earned premiums from sales of supplemental insurance products to offset much of the decline. Earned premiums on property insurance decreased by $2.3 million in 2014, compared to 2013, due primarily to lower
volume, partially offset by higher average premium. The Life & Health Insurance segment has been intentionally running off insurance policies providing dwelling coverage (“Dwelling Policies”) to reduce its exposure to catastrophe risks. Over the last several years, the Life & Health Insurance segment has halted new sales of Dwelling Policies in all markets and non-renewed Dwelling Policies in certain geographical, mainly coastal, areas while continuing to renew policies in other geographical areas. Earned premiums from dwelling coverage comprised 22%, 23% and 26% of the Life & Health Insurance segment’s earned premiums on property insurance in 2014, 2013 and 2012, respectively.
Operating Profit in the Life & Health Insurance segment was $141.9 million before taxes for the year ended December 31, 2014, compared to $136.9 million in 2013. Policyholders’ Benefits and Incurred Losses and LAE decreased by $13.5 million in 2014 due primarily to lower incurred accident and health insurance losses, lower underlying losses on property insurance, lower catastrophe losses and LAE and lower policyholders’ benefits on life insurance, partially offset by an unfavorable impact of property insurance reserve development. Incurred accident and health insurance losses were $81.1 million, or 54.6% of accident and health insurance earned premiums, in 2014, compared to $90.9 million, or 56.3% of accident and health insurance earned premiums, in 2013. Incurred accident and health insurance losses as a percentage of accident and health insurance earned premiums decreased due primarily to a change in business mix from the aforementioned run-off of certain health insurance products. Incurred losses and LAE on property insurance were $24.6 million, or 32.2% of property insurance earned premiums, in 2014, compared to $27.4 million, or 34.8% of property insurance earned premiums, in 2013. Underlying losses and LAE on property insurance were $21.7 million, or 28.4% of property insurance earned premiums, in 2014, compared to $25.6 million, or 32.5% of property insurance earned premiums, in 2013 and decreased due primarily to lower frequency and severity of insurance losses. Catastrophe losses and LAE (excluding reserve development) were $2.0 million in 2014, compared to $3.6 million in 2013. Unfavorable loss and LAE reserve development was $0.9 million in 2014, compared to favorable loss and LAE reserve development of $1.8 million in 2013. Favorable loss and LAE reserve development in 2013 resulted primarily from a final assessment issued by the MWUA that reduced KHSC’s share of MWUA’s losses for the 2004 through 2006 policy periods by $2.0 million. Policyholders’ benefits on life insurance were $268.7 million in 2014, compared to $269.6 million in 2013, which is a decrease of $0.9 million due primarily to a lower provision for future policyholders’ benefits and lower death claims related to insurance policies issued by KHSC, partially offset by the higher volume of insurance from policies issued by Reserve National. Insurance Expenses in the Life & Health Insurance segment decreased by $2.2 million in 2014, compared to 2013, due primarily to lower non-deferrable career agent incentive compensation and service commissions, lower legal costs and lower salary expense from the capitalization of certain salaries in connection with an internal use software project, partially offset by higher commissions and other expenses resulting from the expansion of Reserve National’s distribution channels. Segment Net Operating Income in the Life & Health Insurance segment was $91.8 million for the year ended December 31, 2014, compared to $89.3 million in 2013.
Earned Premiums in the Life & Health Insurance segment decreased by $7.0 million for the year ended December 31, 2013, compared to 2012. Earned premiums on life insurance decreased by $0.7 million in 2013, compared to 2012, due primarily to a
Segment Net Operating Income in the Life & Health Insurance segment was $89.3 million for the year ended December 31, 2013, compared to $90.8 million in 2012.
In the first quarter of 2013, the Company sold several corporate bonds and notes in conjunction with a comprehensive review of the prospects of each issuer in the Company’s publicly-traded corporate bond portfolio. Net Realized Gains on Sales of Fixed Maturities for the year ended December 31, 2013 include realized gains of $24.8 million from such sales. In the third quarter of 2012, the Company sold several municipal securities to take advantage of attractive pricing for such securities and for tax planning and other portfolio management purposes. Net Realized Gains on Sales of Fixed Maturities for the year ended December 31, 2012 include realized gains of $44.9 million from such sales. Other sales activity in 2014, 2013 and 2012 was due to normal portfolio management.
In the third quarter of 2013, the Company sold the building where Kemper’s corporate offices are headquartered and recognized a realized gain of $43.6 million. The sale was part of an effort to reduce the Company’s real estate exposure and reduce the real estate portfolio’s concentration risk.
Net Impairment Losses Recognized in the Consolidated Statement of Income for the year ended December 31, 2014 related to Investments in Fixed Maturities include losses of $0.4 million due to the Company’s intent to sell or requirement to sell bonds of eighteen issuers and credit losses of $5.3 million from other-than-temporary declines in the fair values of investments in fixed maturities of three issuers. Net Impairment Losses Recognized in the Consolidated Statement of Income for the year ended December 31, 2013 related to Investments in Fixed Maturities include losses of $0.8 million due to the Company’s intent to sell or requirement to sell bonds of two issuers and credit losses of $9.5 million from other-than-temporary declines in the fair values of investments in fixed maturities of three issuers. Net Impairment Losses Recognized in the Consolidated Statements of Income for the year ended December 31, 2012 related to Investments in Fixed Maturities include losses of $0.4 million due to the Company’s intent to sell bonds of one issuer and credit losses of $1.5 million from other-than-temporary declines in the fair values of investments in fixed maturities of two issuers.
In 2014, the Company determined that the book value of one property was not recoverable based on the Company’s estimate of the weighted-average, undiscounted cash flows from such property. Accordingly, the Company wrote down the property to its estimated fair value and recognized an impairment loss of $2.4 million in 2014. In 2012, the Company classified certain investments in real estate as held for sale. In connection with such classification, the Company wrote down five properties to their respective estimated net sales prices and recognized impairment losses of $3.1 million in 2012.
Total Comprehensive Investment Gains (Losses) are comprised of Net Realized Gains on Sales of Investments and Net Impairment Losses Recognized in Earnings reported in the Consolidated Statements of Income and unrealized investment gains and losses that are not reported in the Consolidated Statements of Income, but rather are reported in the Consolidated Statements of Comprehensive Income. The components of Total Comprehensive Investment Gains (Losses) for the years ended December 31, 2014, 2013 and 2012 were:
The Company’s fixed maturity investment portfolio is comprised primarily of high-grade municipal, corporate and agency bonds. At December 31, 2014, 92% of the Company’s fixed maturity investment portfolio was rated investment-grade, which is defined as a security having a rating of AAA, AA, A or BBB from S&P; a rating of Aaa, Aa, A or Baa from Moody’s; a rating of AAA, AA, A or BBB from Fitch; or a rating from the NAIC of 1 or 2. The following table summarizes the credit quality of the fixed maturity investment portfolio at December 31, 2014 and 2013:
The following table summarizes the fair value of the Company’s investments in governmental fixed maturities at December 31, 2014 and 2013:
The Company’s short-term investments primarily consist of overnight repurchase agreements, money market funds and U.S. Treasury bills. At December 31, 2014, the Company had $150.0 million invested in overnight repurchase agreements primarily collateralized by securities issued by the U.S. government and government agencies and authorities, $161.1 million invested in money market funds which primarily invest in U.S. Treasury securities and $8.4 million of U.S. Treasury bills. At the time of borrowing, the repurchase agreements generally require the borrower to provide collateral to the Company at least equal to the amount borrowed from the Company. The Company bears some investment risk in the event that a borrower defaults and the value of collateral falls below the amount borrowed. The Company does not have any investments in sovereign debt securities issued by foreign governments.
The following table summarizes the fair value of the Company’s investments in non-governmental fixed maturities by industry at December 31, 2014 and 2013:
Seventy-nine companies comprised more than 75% of the Company’s fixed maturity exposure to the Manufacturing industry at December 31, 2014, with the largest single exposure, Merck & Co. Inc., comprising 2.6%, or $32.6 million, of the Company’s fixed maturity exposure to such industry. Forty companies comprised more than 75% of the Company’s exposure to the Finance, Insurance and Real Estate industry at December 31, 2014, with the largest single exposure, Massachusetts Mutual Life Insurance Company, comprising 4.6%, or $36.2 million, of the Company’s exposure to such industry.
The following table summarizes the fair value of the Company’s ten largest exposures, excluding investments in U.S. Government and Government Agencies and Authorities, pre-refunded municipal bonds and Short-term Investments, at December 31, 2014.
The Company owns investments in various limited liability investment companies and limited partnerships that primarily invest in distressed debt, mezzanine debt and secondary transactions. The Company’s investments in these limited liability investment companies and limited partnerships are reported either as Equity Method Limited Liability Investments, Other Equity Interests and included in Equity Securities, or Fair Value Option Investments depending on the accounting method used to report the investment. See Note 2, “Summary of Accounting Policies and Accounting Changes,” to the Consolidated Financial Statements. Additional information pertaining to these investments at December 31, 2014 and 2013 is presented below:
The Company does not directly participate, as either a lender or borrower of securities, in any securities lending program. The Company does not participate directly in credit default swaps. The Company does not engage directly in hedging activities, including, but not limited to, activities involving interest rate swaps, forward foreign currency contracts, commodities contracts, exchange traded and over-the-counter options or warrants. The Company has limited exposure to such programs and activities by virtue of its investments in the limited liability investment companies and limited partnerships noted above.
The Company’s effective income tax rate from continuing operations differs from the Federal statutory income tax rate due primarily to the effects of tax-exempt investment income and dividends received deductions, and the net effects of state income taxes. Tax-exempt investment income and dividends received deductions were $25.6 million, $30.1 million and $39.8 million in 2014, 2013 and 2012, respectively. State income tax expense, net of federal benefit, from continuing operations was $0.6 million, $0.2 million and $0.8 million in 2014, 2013 and 2012, respectively.
The Company’s effective income tax rate from discontinued operations differs from the Federal statutory income tax rate for the year ended December 31, 2012 due primarily to the net effects of state income taxes. State income tax, net of federal taxes, from discontinued operations was $0.7 million of expense for the year ended December 31, 2012.
Kemper has a four-year, $225.0 million, unsecured, revolving credit agreement, expiring March 7, 2016, with a group of financial institutions. The credit agreement provides for fixed and floating rate advances for periods up to six months at various interest rates. The credit agreement contains various financial covenants, including limits on total debt to total capitalization, consolidated net worth and minimum risk-based capital ratios for Kemper’s largest insurance subsidiaries, United Insurance and Trinity. Proceeds from advances under the credit agreement may be used for general corporate purposes, including repayment of existing indebtedness. Kemper did not borrow under its credit agreements during 2014, 2013 and 2012. There were no outstanding borrowings under the credit agreement at December 31, 2014, and accordingly, $225.0 million was available for future borrowings.
Under various state insurance laws, Kemper’s insurance subsidiaries may pay dividends without obtaining prior regulatory approval based upon levels of statutory capital and surplus and/or net income, as defined by the applicable state law. Kemper’s direct insurance subsidiaries paid dividends of $217.5 million, $95.0 million and $95.0 million to Kemper in 2014, 2013 and 2012, respectively. In 2015, Kemper estimates that its direct insurance subsidiaries would be able to pay $218 million in dividends to Kemper without prior regulatory approval. In addition, Kemper is considering requesting approval from regulators for one of its insurance subsidiaries to pay an extraordinary dividend of up to $100 million.
During 2014, Kemper repurchased approximately 3.2 million shares of its common stock at an aggregate cost of $115.5 million in open market transactions under the two repurchase programs. The Company had $291.0 million of remaining capacity under the 2014 Repurchase Program at December 31, 2014. During 2013, Kemper repurchased approximately 3.0 million shares of its common stock at an aggregate cost of $100.4 million in open market transactions under the 2011 Repurchase Program. 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 2011 Repurchase Program.
Kemper paid a quarterly dividend to shareholders of $0.24 per common share in each quarter of 2014. Dividends paid were $51.8 million for the year ended December 31, 2014.
on Kemper’s senior notes and subordinated debentures include cash and investments directly held by Kemper, receipt of dividends from Kemper’s subsidiaries and borrowings under the credit agreement.
Net Cash Provided by Investing Activities increased by $111.0 million for the year ended December 31, 2013, compared to 2012. Purchases of Fixed Maturities exceeded Sales of Fixed Maturities by $80.1 million in 2013. Sales of Fixed Maturities exceeded Purchases of Fixed Maturities by $41.8 million in 2012. Purchases of Equity Securities exceeded Sales of Equity
Securities by $31.3 million in 2013. Purchases of Equity Securities exceeded Sales of Equity Securities by $66.9 million in 2012. Cash provided by the sale of investment real estate was $102.7 million in 2013 compared to $6.0 million in 2012. Net cash provided by dispositions of short-term investments was $41.8 million in 2013, compared to net cash of $80.0 million used by acquisitions of short-term investments in 2012. Net proceeds from the sale of FAF’s inactive loan portfolio provided $16.7 million of cash in 2012.
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 $3.8 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, 2014.
In addition to the purchase obligations included above, the Company had certain investment commitments totaling $152.9 million at December 31, 2014. The funding of such investment commitments is dependent on a number of factors, the timing of which is indeterminate. The contractual obligations reported above also exclude the Company’s liability of $7.2 million for unrecognized tax benefits. 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 Sheet under GAAP primarily consist of interest obligations related to Long Term Debt Obligations.
The classification of a company’s investment in a financial instrument may affect its reported results. For investments classified as trading or for financial instruments for which a company has elected the fair value option method of accounting, a company is required to recognize changes in the fair values into income for the period reported. Accordingly, both the reported and fair values of the Company’s investments classified as trading were $4.9 million at December 31, 2014. Both the reported and fair values of the Company’s investments accounted for under the fair value option method of accounting were $53.3 million at December 31, 2014. 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, 2014. Changes in the fair value of investments in fixed maturities classified as available for sale, investments in equity securities classified as available for sale and an insurance entity’s investments in equity securities without readily determinable fair values are not recognized to income during the period, but rather are recognized as a separate component of AOCI until realized. All of the Company’s investments in fixed maturities were classified as available for sale at December 31, 2014. Except for investments accounted for under the equity method of accounting or classified as trading, all of the Company’s investments in equity securities at December 31, 2014 are reported at fair value with changes in fair value reported in AOCI until realized. The Company’s investments accounted for under the equity method of accounting consist of the Company’s investments in Equity Method Limited Liability Investments and are valued at cost plus cumulative undistributed comprehensive earnings or losses, and not at fair value.
The Company regularly reviews its investments for factors that may indicate that a decline in the fair value of an investment below its cost or amortized cost 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 for fixed maturity and equity securities in evaluating whether or not a decline in fair value is other than temporary include, but are not limited to, the following:
The ability of the issuer to make scheduled principal and interest payments;
The Company’s determination of whether it will be required to sell the investment before a full recovery in value.
Changes in these factors from their December 31, 2014 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, 2014 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.
exposures, $28.4 million of which was related to asbestos, environmental matters and construction defect exposures at December 31, 2014.
For each accident quarter, 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 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. As an accident quarter 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 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, compared with the paid loss
Medical costs, including, but not limited to, the ability to assess the extent of injuries and the impact of inflation;
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.
Although development will emerge in all of the Company’s product lines, development in the Company’s 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 personal automobile insurance losses and LAE to changes in the cumulative development factors, for each quarterly evaluation point the Company’s actuaries calculated the variability of cumulative development factors observed in the incurred loss development methodology using one standard deviation. The Company believes that one standard deviation of variability is a reasonably likely scenario to measure variability for its loss and LAE reserves under the incurred development method for personal automobile insurance. Assuming that the Company’s personal automobile insurance loss and LAE reserves were based solely on the incurred loss development methodology and the variability in the cumulative development factors occurred within one standard deviation, the Company estimates that the Company’s personal automobile insurance loss and LAE reserves could have varied by $57.2 million in either direction at December 31, 2014 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
All recently issued accounting pronouncements with effective dates prior to January 1, 2015 have been adopted by the Company. There were no adoptions in 2014 that had a material impact on the Consolidated Financial Statements. All other recently issued accounting pronouncements with effective dates after December 31, 2014 are not expected to have a material impact on the Company.
In the first quarter of 2014, the Company realigned its property and casualty insurance businesses. As a result of the realignment, the property and casualty insurance businesses are being reported as a single business segment named the Property & Casualty Insurance segment. The Company has reclassified certain prior-year amounts in its segment results in the Consolidated Financial Statements to conform to the current year presentation.
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 Statement of Income, with the portion of the impairment that is not attributed to a credit loss reported in AOCI.
The Company accounts for the present value of the future profits embedded in Property and Casualty Insurance Customer Relationships Acquired (“P&C Customer Relationships”) based on the present value of estimated future cash flows from the customer relationships acquired. P&C Customer Relationships was $13.3 million and $15.8 million at December 31, 2014 and
2013, respectively. P&C Customer Relationships is amortized using the effective interest method. P&C Customer Relationships is 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.
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. A premium deficiency reserve is established if the sum of expected claim costs, claim adjustment expenses, unamortized deferred policy acquisition costs and maintenance costs exceeds the related unearned premiums. For each business segment, the analysis is performed at a product line level, namely automobile insurance, homeowners insurance and other insurance, which is consistent with the manner in which the Company acquires, services and measures profitability. Anticipated investment income is excluded from such analysis.
recently issued accounting pronouncements with effective dates after December 31, 2014 are not expected to have a material impact on the Consolidated Financial Statements.
The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at December 31, 2013 were:
Included in the fair value of Mortgage and Asset-backed investments at December 31, 2013 are $4.6 million of collateralized debt obligations, $1.2 million of non-governmental residential mortgage-backed securities and $0.2 million of other asset-backed securities.
The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at December 31, 2014 by contractual maturity were:
Unrealized losses on fixed maturities, which the Company determined to be temporary at December 31, 2013, were $79.7 million, of which $9.2 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, 2013 related to securities for which the Company has recognized credit losses in earnings in the preceding table under the heading “Less Than 12 Months.” Included in the preceding table under the heading “12 Months or Longer” there were unrealized losses of $0.3 million at December 31, 2013 related to securities for which the Company has recognized credit losses in earnings. Investment-grade fixed maturity investments comprised $74.2 million and below-investment-grade fixed maturity investments comprised $5.5 million of the unrealized losses on investments in fixed maturities at December 31, 2013. 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, 2013, 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, 2013 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 Company concluded that the unrealized losses on its investments in preferred and common stocks at December 31, 2013 were temporary based on the relative short length and magnitude of the losses and overall market volatility. The Company’s investments in other equity interests include investments in limited liability companies and limited liability partnerships that primarily invest in distressed debt, mezzanine debt and secondary transactions. By the nature of their underlying investments, the Company believes that some of its investments in the limited liability companies and limited liability partnerships also exhibit debt-like characteristics which, among other factors, the Company considers when evaluating these investments for
impairment. Based on Company’s evaluations, the Company concluded that the declines in the fair values of the Company’s investments in equity securities presented in the preceding table were temporary at December 31, 2013.
The following table sets forth the pre-tax amount of OTTI credit losses, recognized in Retained Earnings for Investments in Fixed Maturities held by the Company as of December 31, 2014, 2013 and 2012, 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.
Equity Method Limited Liability Investments include investments in limited liability investment companies and limited partnerships in which the Company’s interests are not deemed minor and are accounted for under the equity method of accounting. The Company’s investments in Equity Method Limited Liability Investments are generally of a passive nature in that the Company does not take an active role in the management of the investment entity. The Company’s maximum exposure to loss at December 31, 2014 is limited to the total carrying value of $184.8 million. In addition, the Company had outstanding commitments totaling approximately $37.7 million to fund Equity Method Limited Liability Investments at December 31, 2014.
The carrying values of the Company’s Other Investments at December 31, 2014 and 2013 were:
Total amortized cost of debt outstanding at December 31, 2014 and 2013 was:
Kemper has a four-year, $225.0 million, unsecured, revolving credit agreement, expiring March 7, 2016, with a group of financial institutions. The credit agreement provides for fixed and floating rate advances for periods up to six months at various interest rates. The credit agreement contains various financial covenants, including limits on total debt to total capitalization, consolidated net worth and minimum risk-based capital ratios for Kemper’s largest insurance subsidiaries, United Insurance and Trinity. Proceeds from advances under the credit agreement may be used for general corporate purposes, including repayment of existing indebtedness. There were no outstanding borrowings under the credit agreement at either December 31, 2014 or December 31, 2013.
The total of minimum rentals to be received in the future under non-cancelable subleases was $5.9 million at December 31, 2014.
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 $437.3 million and $430.2 million at December 31, 2014 and 2013, respectively. Statutory net income for the Company’s life and health insurance subsidiaries was $100.7 million, $81.5 million and $102.0 million for the years ended December 31, 2014, 2013 and 2012, respectively. Statutory capital and surplus for the Company’s property and casualty insurance subsidiaries was $947.5 million and $989.7 million at December 31, 2014 and 2013, respectively. Statutory net income for the Company’s property and casualty insurance subsidiaries was $85.7 million, $138.8 million and $40.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. Statutory capital and surplus and statutory net income exclude parent company operations.
The design of the 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 restricted stock, RSUs and deferred stock units (“DSUs”), if settled with stock, and other stock-based awards.
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 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. Employee Tandem Awards, time-based restricted stock awards and time-based RSU awards generally vest, beginning six months after date of grant, in four equal annual installments over a period of three and one-half years, with the Tandem Awards expiring ten years from the date of grant. Employee performance-based restricted stock and RSU awards generally vest over a period of three years, subject to achievement of performance goals and other restrictions.
All of the Company’s prior stock option plans included provisions, subject to certain limitations, to automatically grant restorative, or reload stock options (“Restorative Options”), to replace shares of previously owned Kemper common stock that an exercising option holder surrenders, either actually or constructively, to satisfy the exercise price and/or tax withholding obligations relating to the exercise. The restorative feature was eliminated prospectively for original option awards granted on or after February 3, 2009. Restorative Options may still be granted, subject to certain limitations, in connection with the exercise of original options granted before February 3, 2009. Restorative Options are subject to the same terms and conditions as the original options, including the expiration date, except that the exercise price is equal to the fair value of Kemper common stock on the date of grant of a Restorative Option and cannot be exercised until six months after the date of grant. The grant of a Restorative Option does not result in an increase in the total number of shares and options held by an employee, but changes the mix of the two.
The weighted-average grant-date fair values of Tandem Awards granted during 2014, 2013 and 2012 were $10.49, $10.20 and $9.40, respectively. Total intrinsic value of Tandem Awards exercised was $0.4 million, $4.1 million and $3.0 million for the years ended December 31, 2014, 2013 and 2012, respectively. Cash received from exercises of Tandem Awards was $0.5 million, $1.7 million and $1.3 million for the years ended December 31, 2014, 2013 and 2012, respectively. Total tax benefit
Information pertaining to Tandem Awards outstanding at December 31, 2014 is presented below:
Prior to February 3, 2009, only awards of time-vested restricted stock had been granted. Beginning on February 3, 2009, in addition to time-vested restricted stock granted to certain employees and officers, the Company began making performance-based restricted awards to certain officers and employees. The initial number of shares or RSUs awarded to each participant of a performance-based award represents the shares that would vest, or, in the case of a RSU, that would vest and would 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 shares or RSUs awarded to the participant. The final payout of these awards, and any forfeitures of shares for performance below the “target” performance level, will be determined based on Kemper’s total shareholder return over a three-year performance period relative to a peer group comprised of all the companies in the S&P Supercomposite Insurance Index.
The grant date fair values of the performance-based restricted stock and performance-based RSU awards 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 performance-based restricted stock and performance-based RSU 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 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.
Activity related to nonvested performance-based restricted stock and nonvested performance-based RSU awards for the year ended December 31, 2014 was as follows:
The total fair value of time-vested and performance-based restricted stock and RSUs that vested during the year ended December 31, 2014 and the 2011 Additional Shares that were issued was $3.6 million and the tax benefits for tax deductions realized from such shares was $1.2 million. The total fair value of the shares of time-vested and performance-based restricted stock that vested during the year ended December 31, 2013 and the 2010 Additional Shares was $4.1 million and the tax benefits for tax deductions realized from such shares was $1.4 million. The total fair value of the shares of time-vested and performance-based restricted stock that vested during the year ended December 31, 2012 and the 2009 Additional Shares was $4.0 million and the tax benefits for tax deductions realized from such shares was $1.4 million.
Activity related to DSU awards for the year ended December 31, 2014 was as follows:
NOTE 11. OTHER COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of Other Comprehensive Income Tax Benefit (Expense) for the years ended December 31, 2014, 2013 and 2012 were:
Other Receivables includes accrued investment income of $65.5 million and $66.7 million at December 31, 2014 and 2013, respectively.
The components of Net Impairment Losses Recognized in Earnings reported in the Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012 were:
Insurance Expenses for the years ended December 31, 2014, 2013 and 2012 were:
The components of Liabilities for Income Taxes at December 31, 2014 and 2013 were:
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, 2014 and 2013 were:
The expiration of federal net operating loss (“NOL”) carryforwards and their related deferred income tax assets is presented below by year of expiration.
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 2006. The expiration of the statute of limitations related to the various state income tax returns that Kemper and its subsidiaries file varies by state.
In July 2014, the Company extended the federal statute of limitations related to its 2007 through 2010 tax years to July 31, 2015. The extension was requested by the Internal Revenue Service (“IRS”) to provide them with additional time to prepare the necessary documentation for the Joint Committee of Taxation’s (“JCT”) review required by statute. The Company does not anticipate a material modification to the filed returns or the related refunds that have been received. It is reasonably possible that the amount of Unrecognized Tax Benefits could decrease by $3.5 million within the next 12 months of the reporting date because of the JCT finishing its review of the IRS’s report without change or the expiration of the statute of limitations referred to above.
During the second quarter of 2014, the Illinois Department of Revenue finalized its examinations of the Company’s 2009 and 2010 tax returns with no material change in the Company’s tax liability.
Unrecognized Tax Benefits at December 31, 2014, 2013 and 2012 include $3.4 million, $3.4 million and $3.5 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 components of Income Tax Expense from Continuing Operations for the years ended December 31, 2014, 2013 and 2012 were:
Net income taxes paid were $37.2 million, $42.4 million and $52.2 million in 2014, 2013 and 2012, respectively.
The Company sponsors a qualified defined benefit pension plan (the “Pension Plan”). The Pension Plan covers approximately 9,500 participants and beneficiaries, of which 2,200 are active employees. The Pension Plan is closed to new employees hired after January 1, 2006. 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, 2014 and 2013 were:
Weighted-average asset allocations for the Pension Plan at December 31, 2014 and 2013 by asset category were:
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 23, “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.
Total Pension Expense Recognized in the Consolidated Statements of Income as presented in the preceding table includes service cost benefits earned and reported in discontinued operations of $0.5 million for the year ended December 31, 2012.
The Company also sponsors a non-qualified supplemental defined benefit pension plan (the “Supplemental Plan”). The unfunded liability related to the Supplemental Plan was $31.0 million and $23.3 million at December 31, 2014 and 2013, respectively. Pension expense for the Supplemental Plan was $1.8 million, $1.8 million and $1.8 million for the years ended December 31, 2014, 2013 and 2012, respectively. An actuarial loss of $7.0 million before taxes, an actuarial gain of $1.5 million before taxes and an actuarial loss of $1.3 million before taxes are included in Other Comprehensive Income (Loss) for the years ended December 31, 2014, 2013 and 2012, respectively.
The Company also sponsors several defined contribution benefit plans covering most of its employees. The Company made contributions to those plans of $7.3 million, $7.3 million and $7.8 million in 2014, 2013 and 2012, respectively.
The Company sponsors an other than pension postretirement employee benefit plan (“OPEB”) that provides medical, dental and/or life insurance benefits to approximately 500 retired and 300 active employees (the “OPEB Plan”). The Company generally is self-insured for the benefits under the OPEB Plan. The 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 requires participant contributions, with most contributions adjusted annually.
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, 2014 and 2013 were:
The assumed health care cost trend rate used in measuring the Accumulated Postretirement Benefit Obligation at December 31, 2014 was 8.0% for 2015, gradually declining to 5.0% in the year 2023 and remaining at that level thereafter for medical benefits and 7.5% for 2015, gradually declining to 5.0% in the year 2023 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, 2013 was 8.5% for 2014, gradually declining to 5.0% in the year 2021 and remaining at that level thereafter for medical benefits and 8.0% for 2014, gradually declining to 5.0% in the year 2022 and remaining at that level thereafter for prescription drug benefits.
The components of Comprehensive OPEB Income for the years ended December 31, 2014, 2013 and 2012 were:
The following benefit payments (net of participant contributions), which consider expected future service, as appropriate, are expected to be paid:
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 $42.1 million, $39.7 million and $31.7 million for
the years ended December 31, 2014, 2013 and 2012, respectively. The Company does not allocate Net Realized Gains on Sales of Investments, Net Impairment Losses Recognized in Earnings, interest expense on debt or postretirement benefit plans, and actuarial gains and losses on its postretirement benefit plans to its operating segments.
Segment Operating Profit (Loss), including a reconciliation to Income from Continuing Operations before Income Taxes, for the years ended December 31, 2014, 2013 and 2012 was:
Segment Net Operating Income (Loss), including a reconciliation to Income from Continuing Operations, for the years ended December 31, 2014, 2013 and 2012 was:
The Company’s catastrophe reinsurance in 2014 also included reinsurance coverage for both the Property & Casualty Insurance and Life & Health Insurance segments from the FHCF for hurricane losses in Florida at retentions lower than those described above.
Coverage for the Company’s primary catastrophe reinsurance program effective January 1, 2012 to December 31, 2012 is provided in various layers as presented below:
Reinsurance premiums for the Company’s primary catastrophe reinsurance programs, the NC Program and the FHCF Program reduced earned premiums for the years ended December 31, 2014, 2013 and 2012 by the following:
Total catastrophe loss and LAE reserves, net of reinsurance recoverables, developed favorably by $14.7 million, $14.5 million and $6.3 million in 2014, 2013 and 2012, respectively. The Property & Casualty Insurance segment reported favorable catastrophe reserve development of $15.8 million, $12.5 million and $6.4 million in 2014, 2013 and 2012, respectively. The Life & Health Insurance segment reported adverse catastrophe reserve development of $1.1 million in 2014, favorable catastrophe reserve development of $2.0 million in 2013 and adverse catastrophe reserve development of $0.1 million in 2012.
In addition to the reinsurance programs described in Note 19, “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 $26.0 million, $33.9 million and $42.5 million for the years ended December 31, 2014, 2013 and 2012, respectively, of which $17.7 million, $23.6 million and $27.1 million, respectively, was related to catastrophe reinsurance. See Note 19, “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 $57.1 million, $52.7 million and $44.0 million for the years ended December 31, 2014, 2013 and 2012, respectively.
The valuation of assets measured at fair value in the Company’s Consolidated Balance Sheet at December 31, 2014 is summarized below:
At December 31, 2014, the Company had unfunded commitments to invest an additional $97.9 million in certain limited liability investment companies and limited partnerships that will be included in Other Equity Interests when funded.
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, 2013.
Over the last several years, certain state insurance regulators, legislators, treasurers/controllers, and their respective agents have been involved in an array of initiatives that seek, in various ways, to impose new duties on life insurance companies to proactively search for deaths of their insureds and contact the insureds’ beneficiaries even though such beneficiaries may not have submitted claims, including due proof of death, as required under the terms of state-approved life insurance policy forms. These initiatives together comprise a set of circumstances involving potential changes in the law or changes in the interpretation of existing laws that could have the effect of altering the terms of Kemper’s life insurance subsidiaries’ (the “Life Companies”) existing life insurance contracts by imposing new requirements that did not exist and were not contemplated at the time the Life Companies’ entered into such contracts.
Legislation. One type of initiative involves legislation. Legislation has been enacted in Indiana, Iowa, Kentucky, Maryland, Montana, Nevada, New York, North Dakota, Rhode Island and Vermont, with varying effective dates (the “DMF Statutes”), that requires life insurance companies to compare on a regular basis their records for all in-force policies (including those policies issued prior to the effective dates of the legislation) against the database of reported deaths maintained by the Social Security Administration or a comparable database (a “Death Master File”). In contrast, New Mexico and Tennessee have enacted legislation that also requires such comparisons, but exempts life insurance companies, like the Life Companies, that have not previously utilized a Death Master File, and instead only requires that such companies conduct Death Master File comparisons for life insurance policies issued and delivered in each of those states after the legislation’s effective date. Likewise, Alabama, Georgia and Mississippi have enacted statutes that require such comparisons, but only with respect to policies issued on or after their respective effective dates, without regard to prior Death Master File use. With respect to those DMF Statutes that apply retroactively and which would likely have an adverse effect on the Company’s operations and financial position, the Life Companies have filed declaratory judgment actions in applicable state courts challenging the application of such statutes to policies issued prior to the subject DMF Statute’s effective date:
In July 2013, certain of the Life Companies filed a declaratory judgment action in state court in Maryland, asking the court to construe the Maryland DMF Statute to apply only prospectively, i.e., only to policies issued in Maryland after the effective date of the Maryland DMF Statute, consistent with what the Life Companies believe are the requirements of the Maryland Constitution and the Contract Clause of the United States Constitution. The Maryland Insurance Administration filed a motion to dismiss the action, contending that the subject Life Companies were required to
exhaust their administrative remedies before filing their action in the trial court. In March 2014, the trial court granted the Maryland Insurance Administration’s motion. The Life Companies appealed the trial court’s ruling. The Maryland appellate courts have declined to stay enforcement of the Maryland DMF Statute pending the appeal, and the Life Companies are complying with the Maryland DMF Statute while they continue to pursue their appeal. The Life Companies’ appeal was heard by the Maryland Court of Special Appeals in December 2014. The parties are awaiting the court’s decision.
In August 2014, certain of the Life Companies filed a declaratory judgment action in Indiana state court, asking the court to construe the Indiana DMF Statute to apply only prospectively, i.e., only with respect to those life insurance policies issued in Indiana on or after the effective date of the Indiana DMF Statute, consistent with what the Life Companies believe are the requirements of applicable Indiana statutory law, the Indiana Constitution and the Contract Clause of the United States Constitution. The Indiana Department of Insurance filed an answer in response to the subject Life Companies’ complaint in October 2014, and the Life Companies filed a motion for summary judgment in January 2015. A hearing on that motion is scheduled for May 2015.
Unclaimed property compliance audits/litigation. A second type of initiative involves an unclaimed property compliance audit of the Life Companies (the “Treasurers’ Audit”) being conducted by a private audit firm retained by the treasurers/controllers of 38 states (the “Audit Firm”) and related litigation. In July 2013, the California State Controller (the “CA Controller”) filed a complaint for injunctive relief against the Life Companies in state court in California, seeking an order requiring the Life Companies to produce all of their in-force policy records to the Audit Firm to enable the firm to perform a comparison of such records against a Death Master File and to ascertain whether any of the insureds under such policies may be deceased. In December 2013, the CA Controller filed a motion for preliminary injunction seeking the same injunctive relief. A hearing on that motion has been continued by the court until the California Court of Appeals rules on a preliminary injunction order issued in a related case involving an unaffiliated life insurance company, entitled Chiang v. American National Insurance Company (the “ANICO Appeal”). In July 2014, the court granted a motion by the CA Controller to stay the Life Companies’ litigation in its entirety, including all discovery, pending a decision in the ANICO Appeal. As described below, the Life Companies have filed a counterclaim in this case against the CA Controller. The current stay of the Controller’s case against the Life Companies means that no substantive ruling is likely to occur before late 2015. Pending the outcome of this litigation, the Life Companies have not produced any of their in-force policy records to the CA Controller.
Examinations/enforcement actions by regulators. A third type of initiative involves examinations and other actions by state insurance regulators. The Life Companies are the subject of a multi-state market conduct examination by five state insurance regulators that is focused on the Life Companies’ claim settlement and policy administration practices, and specifically their compliance with state unclaimed property statutes (the “Multi-State Exam”). The Multi-State Exam was originated in June 2012 as a single-state examination by the Illinois Director of Insurance. Insurance regulators from five additional states - California, Florida, Pennsylvania, New Hampshire and North Dakota - joined the examination in May 2013. In August 2014, New Hampshire withdrew from participation in the Multi-State Exam. In July 2013, the Life Companies received requests from the Illinois Department of Insurance, as the managing lead state for the Multi-State Exam, for a significant volume of information beyond that which the Life Companies had already produced, including their records of all in-force policies and other information of the type previously requested by the Audit Firm as part of the Treasurers’ Audit and which is the subject of the CA Controller’s complaint. This request prompted the Illinois litigation noted below. In August 2014, the Illinois Department of Insurance appointed a law firm to act as an additional examiner in the Multi-State Exam, which remains ongoing.
activity, the CA Controller’s petition for coordination of the five unclaimed property lawsuits pending in California to have them all heard by the same court was denied in January 2015.
Conclusion. The results of the aforementioned legislative actions, Treasurers’ Audit, Multi-State Exam and the related litigation cannot currently be predicted. The Life Companies continue to maintain that states lack the legal authority to establish new requirements that could have the effect of changing the terms of existing life insurance contracts with regard to basic claims handling obligations and processes. If state officials are able to apply such new requirements retroactively to the Life Companies’ existing life insurance policies, it will fundamentally alter the nature and timing of their responsibilities under such policies by effectively eliminating contractual terms that condition claim settlement and payment on the receipt of a claim, including “due proof of death” of an insured. The outcomes of the various state initiatives and related litigation could result in changes in the law that could have the effect of altering the terms of the Life Companies’ existing life insurance contracts by imposing new requirements that have a significant effect on, including acceleration of, the Life Companies’ payment and/or escheatment of policy benefits, and significantly increase their claims handling costs. Any attempt to predict the ultimate outcomes (including any estimate of the resulting effect on claim liabilities and reserves for future policy benefits) of these various efforts to change the law would entail predicting on a state-by-state-basis the ultimate outcomes of numerous uncertainties including, but not limited to: how many states might eventually enact laws or interpret existing laws to require the use of a Death Master File or may exact such usage through regulation, examinations or audits; the matching criteria to be used in comparing records of the Life Companies against a Death Master File; the universe of policies affected; whether and to what extent any such laws would be applied retroactively; and the results of unclaimed property audits, examinations and other actions by state insurance regulators and litigation, including challenges to the constitutionality of laws purporting to have retroactive application. Due to the complexity and multi-jurisdictional nature of this issue, as well as the indeterminate number of potential outcomes and their uncertain effects on the Life Companies’ business, Kemper cannot reasonably estimate the amount of loss that it would recognize if the Life Companies were subjected to requirements of the types described in this Note on a retroactive basis.
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. Kemper’s subsidiary, Trinity had $85.8 million, $154.7 million and $125.2 million in assets managed by FS&C at December 31, 2014, 2013 and 2012, respectively, under an agreement with FS&C whereby FS&C provides investment management services with respect to certain assets of Trinity. In the fourth quarter of 2014, Trinity reduced the amount of assets under management with FS&C by $80.0 million. Investment Expenses incurred in connection with such agreement were $0.3 million, $0.4 million and $0.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.