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 474,000 at 15 locations in nine 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 476,000 at 124 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.
A reconciliation of Segment Net Operating Income to Consolidated Net Operating Income (a non-GAAP financial measure) and to Net Income for the years ended December 31, 2015, 2014 and 2013 is presented below.
Earned Premiums were $2,009.6 million in 2015, compared to $1,862.2 million in 2014, an increase of $147.4 million. Earned Premiums increased by $165.7 million in the Property & Casualty Insurance segment and decreased by $18.3 million in the Life & Health Insurance segment. See MD&A, “Property & Casualty Insurance,” beginning on page 31 and MD&A, “Life & Health Insurance,” beginning on page 41 for discussion the changes in each segment’s earned premiums.
Net Realized Gains on Sales of Investments were $52.1 million in 2015, compared to $39.1 million in 2014. See MD&A, “Investment Results,” under the sub-caption “Net Realized Gains on Sales of Investments” beginning on page 45 for additional
As shown in the preceding table, catastrophe losses and LAE increased for the year ended December 31, 2014, compared to 2013, due primarily to one catastrophe event that exceeded $25 million of losses and LAE and four other catastrophe events
that each exceeded $5 million of losses and LAE in 2014, compared to only one such event exceeding $5 million in 2013, partially offset by lower severity of losses below $5 million per event in 2014, compared to 2013.
Increases (decreases) in the Company’s property and casualty loss and LAE reserves for the years ended December 31, 2015, 2014 and 2013 to recognize adverse (favorable) loss and LAE reserve development from prior accident years in continuing operations, hereinafter also referred to as “reserve development” in the discussion of segment results, are presented below.
Selected financial information illustrating the incremental impact of Alliance United on the Property & Casualty Insurance segment’s premiums, incurred losses and LAE and insurance expenses since the date of acquisition through December 31, 2015 is presented below.
Alliance United’s underlying losses and LAE as a percentage of earned premiums since the acquisition date were significantly higher than what had been reported by Alliance United prior to the acquisition date. Alliance United has experienced significantly higher frequency of claims on all coverages and higher severity of losses on most coverages, particularly bodily injury, than the trend that Kemper had anticipated prior to the acquisition. Alliance United’s premium rates have become inadequate due in part to the significant adverse changes in underlying frequency and severity trends. The Company continues to analyze its experience against industry information as it becomes available and believes that Alliance United’s trends may be worse than industry trends due in part to anti-selection resulting from inadequate rates and higher growth rates for new business, which tends to run at a higher underlying loss and LAE ratio than renewal business. In addition, Alliance United’s results since the acquisition date include adverse loss and LAE reserve development of $7.7 million, net of anticipated indemnification recoveries of $5.9 million, related to periods prior to the acquisition date. Several events have resulted in the historical development factors becoming less reliable in predicting how losses will ultimately emerge. For example, in fourth quarter of 2014, Alliance United’s number of claims closed without payment was significantly higher than historical levels. Subsequent to the acquisition date, the Company’s actuaries have observed a higher level of reopened claims compared to historical levels. In addition, payment development patterns, as well as claim severity patterns, may have been influenced by an inadequate level of claims adjusters, as staffing levels for Alliance United’s claims adjusters were not able to keep pace with Alliance United’s growth rate prior to and after the acquisition date and the recent spike in frequency. See MD&A, “Loss and LAE Reserve Development,” for additional discussion on how changes in business processes may influence development patterns. The Company is taking various actions to address Alliance United’s performance, including increasing the staffing levels for claims adjusters, slowing growth rates for new business, various agency management actions and filing and implementing rate increases.
Net Investment Income in the Property & Casualty Insurance segment increased by $0.6 million for the year ended December 31, 2015, compared to the same period in 2014, due primarily to higher investment income from Equity Method Limited Liability Investments, higher yields on fixed income securities and investment income from the investments acquired from the acquisition of and, the capital contributed to, Alliance United, partially offset by lower dividends on equity securities and lower levels of allocated investments resulting from a decline in the level of capital needed to support the legacy business. The Property & Casualty Insurance segment reported Net Investment Income from Equity Method Limited Liability Investments of $11.9 million in 2015, compared to $8.4 million in 2014.
Underlying losses and LAE as a percentage of earned premiums were 73.2% in 2015, an increase of 5.5 percentage points, compared to 2014. Alliance United, which runs at a higher underlying losses and LAE ratio but lower insurance expense ratio, added 4.8 percentage points to the overall underlying losses and LAE ratio. Excluding the impact of Alliance United, underlying losses and LAE as a percentage of earned premiums were 68.4% in 2015, compared to 67.7% in 2014, or an increase of 0.7 percentage points, as personal automobile insurance, homeowners insurance and commercial automobile insurance deteriorated, while other personal insurance improved. Underlying incurred losses and LAE exclude the impact of catastrophes and loss and LAE reserve development. Catastrophe losses and LAE (excluding reserve development) were $64.5 million in 2015, compared to $96.5 million in 2014, which is a decrease of $32.0 million due primarily to two catastrophe events in 2014 that exceeded $10.0 million of losses and LAE, compared to no such events in 2015, partially offset by an increase in the number of catastrophe events in 2015 with losses and LAE less than $5 million. Excluding the impact of Alliance United, favorable loss and LAE reserve development (including catastrophe reserve development) was $20.6 million in 2015, compared to $54.4 million in 2014.
deductions were $22.6 million in 2015, compared to $20.9 million in 2014. Indemnification recoveries result in an adjustment to the tax purchase price and are excluded from the determination of taxable income and income tax expense. Estimated indemnification recoveries recognized in earnings were $10.4 million in 2015, of which $5.9 million has been reported as a reduction of Incurred Losses and LAE and $4.5 million has been recorded as a reduction of Insurance Expenses.
Underlying losses and LAE as a percentage of earned premiums were 67.7% in 2014, a decrease of 2.7 percentage points compared to 2013, as personal automobile insurance, homeowners insurance and commercial automobile insurance improved, while other personal insurance deteriorated. Underlying losses and LAE exclude the impact of catastrophes and loss and LAE reserve development. Catastrophe losses and LAE (excluding reserve development) were $96.5 million in 2014, compared to $47.1 million in 2013, which was an increase of $49.4 million due primarily to one catastrophe event that exceeded $25 million of losses and LAE and four other catastrophe events that each exceeded $5 million of losses and LAE in 2014, compared to no such events in excess of $5 million in 2013. Favorable loss and LAE reserve development (including catastrophe reserve development) was $54.4 million in 2014, compared to $58.0 million in 2013. Insurance expenses, excluding the write-off of the long-lived software asset, decreased by $21.7 million in 2014, compared to 2013, but increased as a percentage of earned premiums from 27.0% in 2013 to 28.3% in 2014, due primarily to lower earned premiums to absorb fixed costs. 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 $20.9 million in 2014, compared to $27.1 million in 2013.
Earned premiums in personal automobile insurance increased by $196.3 million. Excluding the $272.9 million impact from Alliance United, earned premiums decreased by $76.6 million as lower volume accounted for a decrease of $99.9 million, while higher average earned premium accounted for an increase of $23.3 million. The run-off of the direct-to-consumer business accounted for approximately 24% of the decrease in earned premiums attributed to lower volume.
Catastrophe losses and LAE (excluding reserve development) were $6.7 million in 2015, compared to $12.7 million in 2014. Excluding the impact of Alliance United, favorable loss and LAE reserve development was $9.5 million in 2015, compared to $31.6 million in 2014.
Earned premiums in personal automobile insurance decreased by $127.7 million as lower volume accounted for a decrease of $167.6 million, while higher average earned premium accounted for an increase of $39.9 million. The run-off of the direct-to-consumer business accounted for approximately 20% of the decrease in earned premiums attributed to lower volume.
Catastrophe losses and LAE (excluding reserve development) were $55.4 million in 2015, compared to $80.8 million in 2014. Favorable loss and LAE reserve development was $10.8 million in 2015, compared to $14.8 million in 2014.
Earned premiums in homeowners insurance decreased by $13.8 million as lower volume accounted for a decrease of $39.8 million, while higher average earned premium accounted for an increase of $26.0 million.
Earned premiums in commercial automobile insurance decreased by $0.3 million in 2015, compared to 2014, due primarily to a slight decrease in volume, nearly offset by an increase in average earned premium.
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 the Life & Health Insurance segment decreased by $18.3 million for the year ended December 31, 2015, compared to the same period in 2014. Earned premiums on life insurance decreased by $13.5 million in 2015, compared to 2014, due primarily to an adjustment of $7.6 million recorded in 2015 to correct deferred premium reserves on certain limited pay life insurance policies and lower volume. Excluding the adjustment, earned premiums on life insurance decreased by $5.9 million as a decrease of $8.9 million from life insurance products offered by the Kemper Home Service Companies (“KHSC”) was partially offset by an increase of $3.0 million from life insurance products offered by Reserve National Insurance Company (“Reserve National”) due in part to the impact of the expansion of its distribution channels. Earned premiums on accident and health insurance decreased by $3.7 million in 2015, compared to 2014, due primarily to lower volume resulting from the non-renewal and 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 and higher average earned premium. 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 that sets minimum loss ratios for certain health insurance policies have adversely impacted Reserve National’s business. Such affected health insurance products (the “HCA Affected Products”) accounted for $20.4 million, or 14%, of the segment’s accident and health insurance earned premiums in 2015 and $30.8 million, or 21%, of the segment’s accident and health insurance earned premiums in 2014. Reserve National has adapted its business model in response to the Health Care Acts, has ceased selling HCA Affected Products at the end of 2011, and has transitioned its sales to supplemental health insurance products that are not expected to be as severely impacted by the Health Care Acts. Earned premiums on property insurance decreased by $1.1 million in 2015, compared to 2014, due primarily to lower volume of insurance, partially offset by higher premium rates in a few states.
Net Investment Income decreased by $4.5 million for the year ended December 31, 2015, compared to the same period in 2014, due primarily to lower investment income from other equity interests, partially offset by higher investment income from fixed income securities and Equity Method Limited Liability Investments. Investment income from other equity interests in 2014 included dividend income of $21.4 million from one company that had sold substantially all of its operations. Investment income from fixed income securities increased by $8.8 million due to higher yields and higher levels of investments. The weighted-average book yield on the Company’s life and health insurance subsidiaries’ investments in fixed maturities was approximately 5.8% and 5.7% at December 31, 2015 and 2014, respectively. A protracted low interest rate environment could adversely impact the weighted-average book yield on these subsidiaries’ investments in fixed maturities. For example, the weighted-average book yield on the subsidiaries’ investments in fixed maturities will decline if new money is invested at yields below the portfolio rate. Also, the weighted-average book yield on the subsidiaries’ investments in fixed maturities will decline, to the extent that investments maturing over the next five years are not used for such purposes as paying claims and expenses, if the reinvested portion is at a yield that is lower than the book yield of the maturing investment. The subsidiaries’ investments in fixed maturities that are maturing over the next five years totaled $607.5 million at December 31, 2015. The weighted-average book yield on such investments was 8.3% at December 31, 2015. The reinvestment rate for the subsidiaries’ investments in fixed maturities was approximately 8.0% in 2015 with an average duration of 4.6 years at December 31, 2015. Net investment income from Equity Method Limited Liability Investments was $5.4 million in 2015, compared to net investment loss of $0.4 million in 2014, which is an increase of $5.8 million due primarily to higher investment returns on two distressed debt funds.
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 KHSC was partially offset by an increase of $7.5 million from life insurance products offered by Reserve National. 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. 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
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 Mississippi Windstorm Underwriting Association (“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.
Certain state insurance regulators, legislators and treasurers/controllers are involved in an array of initiatives that could result in significant changes to the application of unclaimed property laws and related 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. It is the Company’s position that state officials lack the legal authority to impose new requirements where such requirements have the effect of changing the terms of existing life insurance contracts. See Item 1A., “Risk Factors,” under the caption “Unclaimed Property Risk Factor,” MD&A, “Liquidity and Capital Resources,” and Note 23, “Contingencies,” to the Consolidated Financial Statements for additional information about these matters.
Net Investment Income decreased by $6.5 million for the year ended December 31, 2015, compared to 2014, due primarily to lower Dividends on Equity Securities, partially offset by higher income on Equity Method Limited Liability Investments and higher Interest and Dividends on Fixed Maturities. Dividends on Equity Securities decreased by $27.5 million. Dividends on Equity Securities in 2014 included dividend income of $21.8 million from one company that had sold substantially all of its operations. Investment income from Equity Method Limited Liability Investments increased by $10.0 million due primarily to higher returns on two distressed debt funds. Interest and Dividends on Fixed Maturities increased by $8.8 million due primarily to higher yields.
The components of Net Realized Gains on Sales of Investments for the years ended December 31, 2015, 2014 and 2013 were:
In 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. Other sales activity in 2015, 2014 and 2013 was due to normal portfolio management.
In 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 Statements of Income for the year ended December 31, 2015 related to Investments in Fixed Maturities include losses of $4.3 million due to the Company’s intent to sell or requirement to sell bonds of four issuers and credit losses of $7.2 million from other-than-temporary declines in the fair values of investments in fixed maturities of six issuers.
Net Impairment Losses Recognized in the Consolidated Statements 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 18 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.
The components of Total Comprehensive Investment Gains (Losses) for the years ended December 31, 2015, 2014 and 2013 is presented below.
The Company’s fixed maturity investment portfolio is comprised primarily of high-grade municipal, corporate and agency bonds. At December 31, 2015, 90% 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, 2015 and 2014:
The following table summarizes the fair value of the Company’s investments in governmental fixed maturities at December 31, 2015 and 2014:
The following table summarizes the fair value of the Company’s investments in non-governmental fixed maturities by range of amount invested at December 31, 2015.
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, 2015 and 2014 is presented below.
In June 2015, the Company decided to cease funding for and abandon a computer software development project for the Company’s Property & Casualty Insurance segment. Accordingly, the Company recorded a charge of $11.1 million before taxes to write off such software.
Interest and Other Expenses was $107.6 million, $91.7 million and $100.5 million for the years ended December 31, 2015, 2014 and 2013, respectively. Interest expense, excluding interest on a mortgage note payable included in real estate investment expense in 2013, was $46.5 million, $46.9 million and $38.1 million for the years ended December 31, 2015, 2014 and 2013, respectively. Other Corporate Expenses were $61.1 million, $44.8 million and $62.4 million for the years ended December 31, 2015, 2014 and 2013, respectively. Other Corporate Expenses increased by $16.3 million for the year ended December 31, 2015, compared to 2014, due primarily to higher postretirement benefit costs and, to a lesser extent, higher compensation expense. Other Corporate Expenses decreased by $17.6 million for the year ended December 31, 2014, compared to 2013, due primarily to lower postretirement benefit costs.
As shown in Note 16, “Pension Benefits,” the Company recognized an actuarial gain of $47.5 million related to its qualified defined benefit pension plan in 2015. The Accumulated Actuarial Loss included in Accumulated Other Comprehensive Income (“AOCI”) for such plan was $152.2 million at December 31, 2015. The actuarial gain in 2015 was due primarily to an increase in the discount rate assumed and, to a lesser extent, a change in the mortality rate assumed as a result of adopting newly-published mortality tables. Amortization of accumulated actuarial losses included as a component of pension expense is anticipated to decrease by $12.6 million in 2016, compared to 2015.
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, interest related to unrecognized tax benefits, estimated indemnification recoveries recognized in earnings pursuant to the Alliance United purchase agreement and the net effects of state income taxes. Tax-exempt investment income and dividends received deductions were $27.9 million, $25.6 million and $30.1 million in 2015, 2014 and 2013, respectively. Estimated indemnification recoveries recognized in earnings result in an adjustment in the tax purchase price and are excluded from the determination of taxable income and income tax expense. Such recoveries were $10.4 million for the year ended December 31, 2015. Tax expense for the year ended December 31, 2015 includes an interest benefit of $2.1 million, including an interest benefit of $2.3 million from the settlement of certain tax years. See Note 15, “Income Taxes,” to the Consolidated Financial Statements for additional discussion of such settlement. State income tax expense, net of federal benefit, from continuing operations was $0.6 million, $0.6 million and $0.2 million in 2015, 2014 and 2013, respectively.
In June 2015, Kemper amended and restated its $225.0 million, unsecured, revolving credit agreement to, among other things, extend the expiration date to June 2, 2020. Prior to the amendment, the credit agreement was scheduled to expire on March 7, 2016. The credit agreement, as amended and restated, provides for fixed and floating rate advances for periods up to six months at various interest rates. The credit agreement, as amended and restated, 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 Universal Insurance Company (“Trinity”). Proceeds from advances under the credit agreement, as amended and restated, may be used for general corporate purposes, including repayment of existing indebtedness. Kemper did not borrow under its credit agreement during 2015, 2014 and 2013. There were no outstanding borrowings under the credit agreement at December 31, 2015, and accordingly, $225.0 million was available for future borrowings.
In February 2015, Kemper issued $250.0 million of its 4.35% senior notes due February 15, 2025. The net proceeds of the issuance were $247.3 million, net of discount and transaction costs, for an effective yield of 4.49%. The 2025 Senior Notes are unsecured and may be redeemed in whole at any time or in part from time to time at Kemper’s option at specified redemption prices. Kemper used the net proceeds from the sale of the 2025 Senior Notes, together with available cash, to redeem in full the $250.0 million outstanding principal amount of its 6.00% Senior Notes due November 30, 2015. Kemper recognized a loss of $9.1 million before income taxes in the first quarter of 2015 from the early redemption of these senior notes.
The outstanding principal balance of Kemper’s debt was $750.6 million at December 31, 2015, of which, $360 million is scheduled to mature on May 15, 2017 (the “2017 Debt”), $250 million is scheduled to mature on February 15, 2025 (the “2025 Debt”) and $150 million is scheduled to mature on February 27, 2054 (the “2054 Debt”). The 2017 Debt and 2025 Debt are currently redeemable at Kemper’s option at specified redemption prices. The 2054 Debt was issued in 2014 and is subordinated to the 2017 Debt and 2025 Debt. Kemper cannot redeem the 2054 Debt prior to February 27, 2019 unless certain tax or rating agency events have occurred. See Note 7, “Debt,” to the Consolidated Financial Statements for additional information regarding Kemper’s debt.
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 $285.0 million, $217.5 million and $95.0 million to Kemper in 2015, 2014 and 2013, respectively. In 2016, Kemper estimates that its direct insurance subsidiaries would be able to pay $168 million in dividends to Kemper without prior regulatory approval.
primarily to support Alliance United’s growing book of business and reductions in statutory capital resulting from the impacts of development of pre-acquisition losses and LAE and non-admission of indemnification receivables. On February 11, 2016 Kemper contributed $25 million of additional capital.
During 2015, Kemper repurchased approximately 1.2 million shares of its common stock at an aggregate cost of $43.5 million in open market transactions under the 2014 Repurchase Program. 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 $247.5 million of remaining capacity under the 2014 Repurchase Program at December 31, 2015. 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.
Kemper directly held cash and investments totaling $341.2 million at December 31, 2015, compared to $330.3 million at December 31, 2014. Sources available for the repayment of indebtedness, repurchases of common stock, future shareholder dividend payments, additional capitalization of its direct insurance subsidiaries, and the payment of interest 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.
issuance of the 2025 Senior Notes and $98.5 million from FHLB advances, compared to net proceeds of $144.0 million related to the issuance of the 2054 Subordinated Debentures in 2014. Kemper used $45.0 million of cash in 2015, including $1.5 million of cash to settle repurchases made at the end of 2014, to repurchase shares of its common stock, compared to using $114.0 million of cash to repurchase shares of its common stock in 2014. Kemper used $49.7 million of cash to pay dividends for the year ended December 31, 2015, compared to $51.8 million in 2014. The quarterly dividend rate was $0.24 per common share for each quarter of 2015 and 2014.
Net Cash Used by Financing Activities decreased by $137.0 million for the year ended December 31, 2014, compared to 2013, due primarily to net proceeds of $144.0 million in 2014 related to the issuance of the 2054 Subordinated Debentures. Kemper used $114.0 million of cash in 2014 to repurchase shares of its common stock, compared to using $100.4 million of cash to repurchase shares of its common stock in 2013. Kemper used $51.8 million of cash to pay dividends in 2014, compared to using $54.9 million of cash to pay dividends in 2013. The quarterly dividend rate was $0.24 per common share for each quarter of 2014 and 2013.
Cash available for investment activities in total is dependent on cash flow from Operating Activities and Financing Activities and the level of cash the Company elects to maintain. Net Cash Used by Investing Activities was $28.6 million for the year ended December 31, 2015, compared to $104.3 million in 2014. Net cash provided by dispositions of short-term investments was $104.9 million for the year ended December 31, 2015, compared to net cash of $63.9 million used by acquisitions of short-term investments in 2014. Fixed Maturities investing activities used net cash of $53.5 million for the year ended December 31, 2015, compared to providing net cash of $20.7 million in 2014. Equity Securities investing activities provided net cash of $104.4 million for the year ended December 31, 2015, compared to using net cash of $10.1 million in 2014. Equity Method Limited Liability Investments investing activities provided net cash of $0.5 million for the year ended December 31, 2015, compared to $33.8 million in 2014. Fair Value Option Investments investing activities used net cash of $111.0 million for the year ended December 31, 2015, compared to using net cash of $54.0 million in 2014. Net cash used to acquire Alliance United was $57.6 million for the year ended December 31, 2015 compared to net cash of $8.9 million provided by the disposition of a subsidiary in 2014. Purchases of Corporate-owned Life Insurance were $7.5 million for the year ended December 31, 2015, compared to $33.5 million in 2014.
Estimated cash disbursements pertaining to the Company’s contractual obligations at December 31, 2015 are presented below.
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, 2015.
In addition to the purchase obligations included above, the Company had certain investment commitments totaling $176.1 million at December 31, 2015. 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 $3.8 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 fair value of the Company’s investments measured and reported at fair value was $5,544.7 million at December 31, 2015, of which $4,613.5 million, or 83%, were investments that were based on quoted market prices or significant value drivers that are observable and $931.2 million, or 17%, were investments where at least one significant value driver was 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, 2015 due to changing market conditions and limitations inherent in the estimation process.
The classification of a company’s investment in a financial instrument may affect its reported results. 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 $4.7 million at December 31, 2015. Both the reported and fair values of the Company’s investments accounted for under the fair value option method of accounting were $164.5 million at December 31, 2015. 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, 2015. 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, 2015. 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, 2015 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’s Property and Casualty Insurance Reserves are reported using the Company’s estimate of its ultimate liability for losses and LAE for claims that occurred prior to the end of any given accounting period but have not yet been paid. The Company had $862.8 million and $733.9 million of gross loss and LAE reserves at December 31, 2015 and 2014, respectively.
Property and Casualty Insurance Reserves for the Company’s business segments at December 31, 2015 and 2014 were:
In estimating the Company’s Property and Casualty Insurance Reserves, the Company’s actuaries exercise professional judgment and must consider, and are influenced by, many variables that are difficult to quantify. Accordingly, the process of estimating and establishing the Company’s Property and Casualty Insurance Reserves is inherently uncertain, and the actual ultimate net cost of known and unknown claims may vary materially from the estimated amounts reserved. The reserving process is particularly imprecise for claims involving asbestos, environmental matters, construction defect and other emerging and/or long-tailed exposures which may not be discovered or reported until years after the insurance policy period has ended. Property and Casualty Insurance Reserves related to the Company’s discontinued operations are predominantly long-tailed exposures, $20.3 million of which was related to asbestos, environmental matters and construction defect exposures at December 31, 2015.
selections. However, such bands do not necessarily constitute a range of outcomes, nor does the Company’s management or the Company’s actuaries calculate a range of outcomes.
The key assumption in these estimation methodologies is that patterns observed in prior periods are indicative of how losses and LAE are expected to develop in the future and that such historical data can be used to predict and estimate ultimate losses and LAE. However, changes in the Company’s business processes, by their very nature, are likely to affect the development patterns, which generally results in the historical development factors becoming less reliable over time in predicting how losses and LAE will ultimately develop. The ultimate impact of a single change in a business process is difficult to quantify and detect, and even more difficult if several changes to business processes occur over several years. Initially after a change is implemented, there are fewer data points, as compared to the historical data, for the Company’s actuaries to analyze. With fewer data points to analyze, the Company’s actuaries cannot be certain that observed differences from the historical data trends are a result of the change in business process or merely a random fluctuation in the data. As the Company’s actuaries observe more data points following the change in business process, the Company’s actuaries can gain more confidence in whether the change in business process is affecting the development pattern. The challenge for the Company’s actuaries is how much weight to place on the development patterns based on the older historical data and how much weight to place on the development patterns based on more recent data.
For each accident quarter, 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 development methodology. However, in some circumstances changes can occur which impact numerous variables, including, but not limited to, those variables identified below that are difficult to quantify and/or impact the predictive value of prior development patterns relied upon in the incurred loss development methodology and paid loss development methodology. In those circumstances, the Company’s actuaries must make adjustments to these loss reserving estimation methodologies or use additional generally accepted actuarial estimation methodologies. In those circumstances, the Company’s actuaries, using their professional judgment, may place more weight on the adjusted loss reserving estimation methodologies or other generally accepted actuarial estimation methodologies until the newer development patterns fully emerge and the Company’s actuaries can fully rely on the unadjusted loss reserving estimation methodologies. In the event of a wide variation among results generated by the different projection methodologies, the Company’s actuaries further analyze the data using additional techniques.
While the Company believes that none of its reporting units with material Goodwill are at risk of failing step one of the goodwill impairment test, the process of determining whether or not an asset, such as Goodwill, is impaired or recoverable relies on projections of future cash flows, operating results and market conditions. Such projections are inherently uncertain
and, accordingly, actual future cash flows may differ materially from projected cash flows. In evaluating the recoverability of Goodwill, the Company performs a discounted cash flow analysis for each of the Company’s reporting units carrying Goodwill. The discounted cash value may be different from the fair value that would result from an actual transaction between a willing buyer and a willing seller. Such analyses are particularly sensitive to changes in discount rates and investment rates. Changes to these rates might result in material changes in the valuation and determination of the recoverability of Goodwill. For example, an increase in the rate used to discount cash flows will decrease the discounted cash value. There is likely to be a similar, but not necessarily as large as, increase in the investment rate used to project the cash flows resulting from investment income earned on the Company’s investments. Accordingly, an increase in the investment rate would increase the discounted cash value.
A change in any one or more of these assumptions is likely to result in a projected benefit obligation or pension cost that differs from the actuarial estimates at December 31, 2015. Such changes in estimates may be material. For example, a one-percentage point decrease in the Company’s estimated discount rate would increase the pension benefit obligation at December 31, 2015 by $90.5 million, while a one-percentage point increase in the rate would decrease the pension benefit obligation at December 31, 2015 by $72.5 million. A one-percentage point decrease in the Company’s estimated long-term rate of return on plan assets would increase the pension expense for the year ended December 31, 2015 by $5.2 million, while a one-percentage point increase in the rate would decrease pension expense by $5.2 million for the same period.
All recently issued accounting pronouncements with effective dates prior to January 1, 2016 have been adopted by the Company. The Company also early adopted ASU 2015-01, Income Statement-Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, and ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. See Note 2, “Summary of Accounting Policies and Accounting Changes” for discussion on adoption of these ASUs and impacts to the Company’s financial statements, which were not material. With the possible exceptions of ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which the Company is currently evaluating the impact of adoption, and the additional disclosure requirements of ASU 2015-09, Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts, the Company does not expect the adoption of all other recently issued accounting pronouncements with effective dates after December 31, 2015 to have a material impact on the Company’s financial statements. All other recently issued accounting pronouncements with effective dates after December 31, 2015 are not expected to have a material impact on the Company.
Consolidated Statements of Income for the Years Ended December 31, 2015, 2014 and 2013
Investments in Fixed Maturities include bonds, notes and redeemable preferred stocks. Investments in Fixed Maturities are classified as available for sale and reported at fair value. Net Investment Income, including amortization of purchased premiums and accretion of market discounts, on Investments in Fixed Maturities is recognized as interest over the period that it is earned using the effective yield method.
Costs directly associated with the successful acquisition of business, principally commissions and certain premium taxes and policy issuance costs, are deferred. Costs deferred on property and casualty insurance contracts and short duration health insurance contracts are amortized over the period in which premiums are earned. Costs deferred on traditional life insurance products and other long-duration insurance contracts are primarily amortized over the anticipated premium-paying period of the
Internal use software is amortized over the useful life of the asset using the straight-line method of amortization. Write-offs of Long-lived Assets for the year ended December 31, 2015 was a charge of $11.1 million to write off the costs of a computer software development project that was abandoned by the Company’s Property & Casualty Insurance segment. Write-offs of Long-lived Assets for the year ended December 31, 2014 was a charge of $54.6 million to write off certain software for the Company’s Property & Casualty Insurance segment after the Company determined that it was no longer probable that the software would be fully implemented.
The Company accounts for the present value of the future profits embedded in life insurance in force acquired (“Life VIF”) based on actuarial estimates of the present value of estimated net cash flows. Life VIF was $32.5 million and $36.5 million at December 31, 2015 and 2014, respectively. Life VIF is amortized using the effective interest method using interest rates
consistent with the rates in the underlying insurance contracts. The Company estimates that it will record Life VIF amortization, net of interest, of $3.4 million in 2016, $3.2 million in 2017, $2.8 million in 2018, $2.4 million in 2019 and $2.0 million in 2020. The Company evaluates the Life VIF for recoverability annually.
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 $11.2 million and $13.3 million at December 31, 2015 and 2014, 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. The Company performs a premium deficiency analysis typically at a product line level, namely automobile insurance, homeowners insurance and other insurance, which is consistent with the manner in which the Company acquires and services policies and measures profitability. Anticipated investment income is excluded from such analysis. A premium deficiency is recognized when the sum of expected claim costs, claim adjustment expenses, unamortized deferred policy acquisition costs and maintenance costs exceeds the related unearned premiums by first reducing related deferred policy acquisition costs to an amount, but not below zero, at which the premium deficiency would not exist. If a premium deficiency remains after first reducing deferred policy acquisition costs, a premium deficiency reserve is established and reported as a liability in the Company’s financial statements. The Company determined that a premium deficiency existed at December 31, 2015 with respect to Alliance United’s automobile insurance and recorded a charge of $9.0 million to reduce related deferred policy acquisition costs to the level at which the premium deficiency did not exist.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The amendments in ASU 2015-02 affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities while also eliminating the presumption that a general partner should consolidate a limited partnership. ASU 2015-02 may also affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for fiscal years beginning after December 15, 2015 and interim periods within those years with early adoption being permissible. The Company is currently evaluating the impact of this guidance on its financial statements.
In May 2015, the FASB issued ASU 2015-09, Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts. ASU 2015-09 requires insurers to provide additional disclosures about short-duration insurance contracts, focusing particularly on the liability for unpaid claims and claim adjustment expenses. Insurers will be required to disclose tables showing incurred and paid claims development information by accident year for the number of years that claims typically remain outstanding, although not to exceed ten years, as well as a reconciliation of this information to the balance sheet. Additional disclosures will also be required on the total of incurred-but-not-reported liabilities plus expected development on reported claims, reserving methodologies, quantitative information about claim frequency, qualitative description of methodologies used for determining claim frequency and average annual percentage payout of incurred claims by age. ASU 2015-09 is effective for annual periods beginning after December 31, 2015 and interim periods within annual periods beginning after December 15, 2016. Except for the retrospective application of additional disclosure requirements, adoption of ASU 2015-09 will not impact the Company’s financial statements.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 simplifies the accounting for measurement-period adjustments in a business combination by requiring the acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The effect on earnings as a result of the change to the provisional amounts, calculated as if the accounting had been completed as of the acquisition date, must be
recorded in the reporting period in which the adjustment amounts are determined rather than retrospectively. The effects, by line item, if any, must be disclosed. The Company prospectively adopted ASU 2015-16 in the third quarter of 2015.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most significantly, the ASU requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The ASU also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company currently records its Investments in Equity Securities at fair value with net unrealized appreciation or depreciation reported in AOCI in Shareholders’ Equity. Adoption of this ASU will require the changes in fair value on Investments in Equity Securities with readily determinable fair values to be recorded in net income. For those Investments in Equity Securities that do not have readily determinable fair values, the Company may choose either of the methods noted earlier in this paragraph. The Company will not be able to determine the cumulative-effect adjustment to its balance sheet until the ASU is adopted and elections on Investments in Equity Securities that do not have readily determinable fair values are made. Subsequent to adoption, the ASU is expected to cause increased volatility in the Company’s statement of income.
All recently issued accounting pronouncements with effective dates prior to January 1, 2016 have been adopted by the Company. There were no adoptions of such accounting pronouncements in 2015 that had a material impact on the Company’s Consolidated Financial Statements. The impacts of adoption of ASU 2015-09, Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts, and ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, are discussed above. The Company does not expect the adoption of all other recently issued accounting pronouncements with effective dates after December 31, 2015 to have a material impact on the Company’s financial statements.
Under the purchase agreement, the Company is indemnified up to $12.5 million on an after-tax basis for, among other things, breaches of customary representations and warranties, loss and LAE reserve development and pre-closing income taxes. In addition, the Company is indemnified, up to $5.0 million on an after-tax basis, for certain employment related matters. Other Receivables in the preceding table include an indemnification receivable of $5.4 million. Other Receivables in the Consolidated Balance Sheet at December 31, 2015 include an indemnification receivable of $15.9 million.
The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at December 31, 2015 were:
The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at December 31, 2015 by contractual maturity were:
and Asset-backed Securities Not Due at a Single Maturity Date at December 31, 2015 consisted of securities issued by the Government National Mortgage Association with a fair value of $107.0 million, securities issued by the Federal National Mortgage Association with a fair value of $17.1 million, securities issued by the Federal Home Loan Mortgage Corporation with a fair value of $6.0 million and securities of other non-governmental issuers with a fair value of $92.4 million.
With respect to Investments in Equity Securities, the Company concluded that the unrealized losses on its investments in preferred and common stocks at December 31, 2015 were temporary based on various factors, including 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 partnerships that primarily invest in mezzanine debt, distressed 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 partnerships exhibit debt-like characteristics which, among other factors, the Company also considers when evaluating these investments for impairment. Based on evaluations of the factors in the preceding paragraph, 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, 2015.
With respect to Investments in Equity Securities, the Company concluded that the unrealized losses on its investments at December 31, 2014 were temporary based on various factors, including the relative short length and magnitude of the losses and overall market volatility, as well as, the debt-like characteristics of investments in certain other equity interests.
Equity Method Limited Liability Investments include investments in limited liability investment companies and limited partnerships in which the Company’s interests are not deemed minor and are accounted for under the equity method of accounting. The Company’s investments in Equity Method Limited Liability Investments are generally of a passive nature in that the Company does not take an active role in the management of the investment entity. In 2015, 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 Method Limited Liability Investments in which the Company invested totaled $3,801.7 million and $3,349.7 million as of December 31, 2015 and 2014, respectively. Aggregate total liabilities of the Equity Method Limited Liability Investments in which the Company invested totaled $879.1 million and $711.5 million as of December 31, 2015 and 2014, respectively. Aggregate net income of the Equity Method Limited Liability Investments in which the Company invested totaled $159.6 million, $96.2 million and $181.1 million for the years ended December 31, 2015, 2014 and 2013, respectively. The aggregate summarized financial data is based on the most recent and sufficiently-timely financial information available to the Company as of the respective reporting dates and periods. The Company’s maximum exposure to loss at December 31, 2015 is limited to the total carrying value of $190.6 million. In addition, the Company had outstanding commitments totaling approximately $58.8 million to fund Equity Method Limited Liability Investments at December 31, 2015.
The carrying values of the Company’s Other Investments at December 31, 2015 and 2014 were:
Goodwill balances by business segment at December 31, 2015 and December 31, 2014 were:
In 2015, the Company reduced its property and casualty insurance reserves by $20.1 million to recognize favorable development of losses and LAE from prior accident years, including the impact of adverse development of $7.7 million, net of estimated indemnification recoveries, related to Alliance United for periods prior to the date of its acquisition. Personal lines insurance loss and LAE reserves developed favorably by $13.3 million and commercial lines insurance loss and LAE reserves developed favorably by $6.8 million. Personal automobile insurance loss and LAE reserves developed favorably by $1.8 million, net of the adverse development related to Alliance United, homeowners insurance loss and LAE reserves developed favorably by $10.8 million, and other personal lines loss and LAE reserves developed favorably by $0.7 million. Excluding the adverse development related to Alliance United for periods prior to the date of its acquisition, personal lines insurance losses and LAE reserves developed favorably by $21.0 million due primarily to the emergence of more favorable loss patterns than expected for the 2013, 2012 and 2011 accident years. Commercial lines insurance loss and LAE reserves included adverse development of $1.8 million from continuing operations and favorable development of $8.6 million from discontinued operations.
Reinsurance and indemnification recoverables on property and casualty insurance reserves were $52.0 million and $54.9 million at December 31, 2015 and 2014, respectively. These recoverables are concentrated with several reinsurers, the vast majority of which are highly rated by one or more of the principal investor and/or insurance company rating agencies. While most of these recoverables were unsecured at December 31, 2015 and 2014, the agreements with the reinsurers generally provide for some form of collateralization upon the occurrence of certain events.
Interest Paid, including facility fees, for the years ended December 31, 2015, 2014 and 2013 was:
Trinity and United Insurance are members of the FHLB of Dallas and Chicago, respectively. Effective December 31, 2013, Trinity and the FHLB of Dallas entered into agreements pursuant to which Trinity may obtain advances from the FHLB of Dallas. Effective March 18, 2014, United Insurance and the FHLB of Chicago entered into agreements pursuant to which United Insurance may obtain advances from the FHLB of Chicago. Advances from the FHLB of Dallas and Chicago are subject to collateral requirements as specified in the respective agreements with Trinity and United Insurance. During 2015, Trinity borrowed and repaid $77.5 million under its agreement with the FHLB of Dallas. During 2015, United Insurance borrowed and repaid $21.0 million under its agreement with the FHLB of Chicago. There were no advances from the FHLB of Dallas or Chicago outstanding at either December 31, 2015 or December 31, 2014.
Net rental expense for operating leases for the years ended December 31, 2015, 2014 and 2013 was:
Future minimum lease payments under capital and operating leases at December 31, 2015 were:
Kemper is authorized to issue 20 million shares of $0.10 par value preferred stock and 100 million shares of $0.10 par value common stock. No preferred shares were issued or outstanding at December 31, 2015 and 2014. There were 51,326,751 shares and 52,418,246 shares of common stock outstanding at December 31, 2015 and 2014, respectively. Common stock outstanding included 80,848 shares and 163,720 shares at December 31, 2015 and 2014, respectively, that have been issued, subject to certain vesting and other requirements, in connection with the Company’s long-term equity compensation plans. See Note 10,
Various state insurance laws restrict the amount that an insurance subsidiary may pay in the form of dividends, loans or advances without the prior approval of regulatory authorities. Also, that portion of an insurance subsidiary’s net equity which results from differences between statutory insurance accounting practices and GAAP would not be available for cash dividends, loans or advances. Kemper’s insurance subsidiaries paid dividends of $285.0 million to Kemper in 2015. In 2016, Kemper’s insurance subsidiaries would be able to pay $168 million in dividends to Kemper without prior regulatory approval. Kemper’s insurance subsidiaries had net assets of $2.4 billion, determined in accordance with GAAP, that were restricted from payment to Kemper without prior regulatory approval at December 31, 2015.
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 $394.6 million and $437.3 million at December 31, 2015 and 2014, respectively. Statutory net income for the Company’s life and health insurance subsidiaries was $62.8 million, $100.7 million and $81.5 million for the years ended December 31, 2015, 2014 and 2013, respectively. Statutory capital and surplus for the Company’s property and casualty insurance subsidiaries was $957.7 million and $947.5 million at December 31, 2015 and 2014, respectively. Statutory net income for the Company’s property and casualty insurance subsidiaries was $58.9 million, $85.7 million and $138.8 million for the years ended December 31, 2015, 2014 and 2013, respectively. Statutory capital and surplus and statutory net income exclude parent company operations.
On May 4, 2011, Kemper’s shareholders approved the 2011 Omnibus Equity Plan (“Omnibus Plan”). The Omnibus Plan replaced the Company’s previous employee stock option plans, director stock option plan and restricted stock plan (collectively, the “Prior Plans”). Awards previously granted under the Prior Plans remain outstanding in accordance with their original terms. Beginning May 4, 2011, equity-based compensation awards may only be granted under the Omnibus Plan. A maximum number of 10,000,000 shares of Kemper common stock may be issued under the Omnibus Plan (the “Share Authorization”). As of December 31, 2015, there were 7,636,921 common shares available for future grants under the Omnibus Plan, of which 538,500 shares were reserved for future grants based on the achievement of performance goals under the terms of outstanding performance-based restricted stock and performance-based restricted stock unit (“RSU”) awards.
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.
Outstanding equity-based compensation awards at December 31, 2015 consisted of tandem stock option and stock appreciation rights (“Tandem Awards”), time-vested restricted stock, time-vested RSUs, performance-based restricted stock, performance-based RSUs and DSUs. Effective February 4, 2014, the Company began issuing time-based and performance-based RSUs. Recipients of restricted stock receive full dividend and voting rights on the same basis as all other outstanding shares of Kemper common stock. RSUs and DSUs give the recipient the right to receive one share of Kemper common stock for each RSU or DSU issued. Recipients of RSUs and DSUs receive full dividend equivalents on the same basis as all other outstanding shares of Kemper common stock, but do not receive voting rights until such shares are issued. Except as described below for equity-based compensation awards granted to each member of the Board of Directors who is not employed by the Company (“Non-employee Directors”), all outstanding awards are subject to forfeiture until certain restrictions have lapsed.
The Company uses the Black-Scholes option pricing model to estimate the fair value of each Tandem Award on the date of grant. The expected terms of Tandem Awards are developed by considering the Company’s historical Tandem Award exercise experience, demographic profiles, historical share retention practices of employees and assumptions about their propensity for
early exercise in the future. Further, the Company aggregates individual awards into relatively homogenous groups that exhibit similar exercise behavior to obtain a more refined estimate of the expected term of options. Expected volatility is estimated using weekly historical volatility. The Company believes that historical volatility is currently the best estimate of expected volatility. The dividend yield in 2015, 2014 and 2013 was calculated by taking the natural logarithm of the annualized yield divided by the Kemper common stock price on the date of grant. The risk-free interest rate was the yield on the grant date of U.S. Treasury zero coupon issues with a maturity comparable to the expected term of the option.
Tandem Award activity for the year ended December 31, 2015 is presented below.
The grant-date fair values of time-based restricted stock and time-based RSU awards are determined using the closing price of Kemper common stock on the date of grant. Activity related to nonvested time-based restricted stock and nonvested time-based RSUs for the year ended December 31, 2015 is presented below.
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
Activity related to nonvested performance-based restricted stock and nonvested performance-based RSU awards for the year ended December 31, 2015 is presented below.
The number of additional shares that would be granted if the Company were to meet or exceed the maximum performance levels related to the outstanding performance-based awards for the 2015 and 2014 three-year performance periods was 67,625 common shares and 60,475 common shares, respectively, (as “full value awards,” the equivalent of 202,875 shares and 181,425 shares, respectively, under the Share Authorization) at December 31, 2015. For the 2013 three-year performance period, the Company’s performance level was below the minimum performance level, and all of the related 51,400 shares of performance-based restricted shares were forfeited on February 4, 2016, the three-year anniversary of their grant date. For the 2012 three-year performance period, the Company’s performance level was below the minimum performance level, and all of the related 57,775 shares of performance-based restricted shares were forfeited on January 31, 2015, the three-year anniversary of their grant date. For the 2011 three-year performance period, the Company’s performance level exceeded target performance levels with a payout percentage of 118%. Accordingly, an additional 9,014 shares of stock were issued to award recipients on February 1, 2014 (the “2011 Additional Shares”). For the 2010 three-year performance period, the Company’s performance level exceeded the target performance level with a payout percentage of 114%. Accordingly, an additional 6,996 shares of stock were issued to award recipients on February 2, 2013 (the “2010 Additional Shares”).
The total fair value of time-vested and performance-based restricted stock and RSUs that vested during the year ended December 31, 2015 was $1.4 million. The tax benefits for tax deductions realized from such shares was $0.5 million. The total fair value of the shares of time-vested and performance-based restricted stock that vested during the year ended December 31, 2014 and the 2011 Additional Shares was $3.6 million. 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. 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, 2015 is presented below.
The number of shares of Kemper common stock that were excluded from the calculations of Equity-based Compensation Equivalent Shares and Weighted-average Unrestricted Shares and Equivalent Shares Outstanding Assuming Dilution for the years ended December 31, 2015, 2014 and 2013 because the exercise prices for the options exceeded the average market price is presented below.
The components of AOCI at December 31, 2015 and 2014 were:
Components of AOCI were reclassified to the following lines of the Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013:
Other Receivables includes accrued investment income of $68.5 million and $65.5 million at December 31, 2015 and 2014, respectively.
Insurance Expenses for the years ended December 31, 2015, 2014 and 2013 were:
The components of Liabilities for Income Taxes at December 31, 2015 and 2014 were:
The expiration of federal net operating loss (“NOL”) carryforwards and their related deferred income tax assets at December 31, 2015 is presented below by year of expiration.
A reconciliation of the beginning and ending amount of Unrecognized Tax Benefits for the years ended December 31, 2015, 2014 and 2013 is presented below.
In the first quarter of 2015, the Company extended the federal statute of limitations for the 2007 through 2011 tax years until December 31, 2015. The extension was requested by the Internal Revenue Service (“IRS”) to provide the Joint Committee on Taxation (“JCT”) additional time to complete a review required by statute. In the second quarter of 2015, the Company received a letter indicating that the JCT had completed its review and had taken no exception to the IRS’s conclusion to accept the tax returns as filed, effectively settling the extended years. Accordingly, the Company reduced its Liability for Unrecognized Tax Benefits by $3.6 million for accrued interest and recognized an income tax benefit of $2.3 million in the second quarter of 2015.
Net income taxes paid were $44.4 million, $37.2 million and $42.4 million in 2015, 2014 and 2013, respectively.
A reconciliation of the Statutory Federal Income Tax Expense and Rate to the Company’s Effective Income Tax Expense and Rate from Continuing Operations for the years ended December 31, 2015, 2014 and 2013 is presented below.
Comprehensive Income Tax Expense included in the Consolidated Financial Statements for the years ended December 31, 2015, 2014 and 2013 was:
The Company sponsors a qualified defined benefit pension plan (the “Pension Plan”). The Pension Plan covers approximately 9,300 participants and beneficiaries, of which 2,000 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.
The measurement dates of the assets and liabilities at end of year presented in the preceding table under the headings, “2015” and “2014” were December 31, 2015 and December 31, 2014, respectively.
Additional information pertaining to the changes in the fair value of the Pension Plan’s assets classified as Level 3 for the year ended December 31, 2014 is presented below.
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 250 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.
Changes in Fair Value of Plan Assets and Changes in Accumulated Postretirement Benefit Obligation for the years ended December 31, 2015 and 2014 were:
The measurement dates of the assets and liabilities at end of year in the preceding table under the headings “2015” and “2014” were December 31, 2015 and December 31, 2014, respectively.
The weighted-average discount rate and rate of increase in future compensation levels used to develop the components of the Accumulated Postretirement Benefit Obligation at December 31, 2015 and 2014 were:
The components of Comprehensive OPEB Income for the years ended December 31, 2015, 2014 and 2013 were:
The Company estimates that OPEB Expense for the year ended December 31, 2016 will include income of $1.3 million resulting from the amortization of the related accumulated actuarial gain included in AOCI at December 31, 2015.
The weighted-average discount rate and rate of increase in future compensation levels used to develop OPEB Expense for the years ended December 31, 2015, 2014 and 2013 were:
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 $43.4 million, $42.1 million and $39.7 million for
the years ended December 31, 2015, 2014 and 2013, 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 Net Operating Income, including a reconciliation to Income from Continuing Operations, for the years ended December 31, 2015, 2014 and 2013 was:
Summary financial information included in Income from Discontinued Operations for the years ended December 31, 2015, 2014 and 2013 is presented below.
The Company manages its exposure to catastrophes and other natural disasters through a combination of geographical diversification, restrictions on the amount and location of new business production in certain regions, and reinsurance. To limit its exposures to catastrophic events, the Company maintains various catastrophe reinsurance programs for its property and casualty insurance businesses.
Coverage for the Property & Casualty Insurance segment’s primary catastrophe reinsurance program effective January 1, 2014 to December 31, 2014 is provided in various layers as presented below.
Coverage for the Property & Casualty Insurance segment’s primary catastrophe reinsurance program effective January 1, 2013 to December 31, 2013 is provided in various layers as presented below.
The catastrophe reinsurance program for the Property & Casualty Insurance segment in 2013 also included reinsurance coverage, under a policy that expired on June 1, 2013, for catastrophe losses in North Carolina at retentions lower than those presented in the preceding table.
In the event that the Property & Casualty Insurance segment’s incurred catastrophe losses and LAE covered by any of its catastrophe reinsurance programs presented in the three preceding tables exceed the retention for that particular layer, each of the programs required one reinstatement of such coverage. In such an instance, the Property & Casualty Insurance segment is required to pay a reinstatement premium to the reinsurers to reinstate the full amount of reinsurance available under such layer.
The Property & Casualty Insurance segment’s catastrophe reinsurance in 2015, 2014 and 2013 also included reinsurance coverage from the FHCF for hurricane losses in Florida at retentions lower than those described above. The Life & Health Insurance also purchases reinsurance from the FHCF for hurricane losses in Florida. Except for the coverage provided by the FHCF, the Life & Health Insurance segment has not carried any other catastrophe reinsurance since 2012, primarily due to actions taken by the Life & Health Insurance segment to reduce its exposures to catastrophes.
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, 2015, 2014 and 2013 by the following:
Earned Premiums ceded on long-duration and short-duration policies were $20.6 million, $26.0 million and $33.9 million for the years ended December 31, 2015, 2014 and 2013, respectively, of which $12.9 million, $17.7 million and $23.6 million, respectively, was related to catastrophe reinsurance. See Note 20, “Catastrophe Reinsurance,” to the Consolidated Financial Statements for additional information regarding the Company’s catastrophe reinsurance programs. Certain insurance subsidiaries assume business from other insurance companies and involuntary pools. Earned Premiums assumed on long-duration and short-duration policies were $60.0 million, $57.1 million and $52.7 million for the years ended December 31, 2015, 2014 and 2013, respectively.
The Company classifies its Investments in Fixed Maturities and Equity Securities as available for sale and reports these investments at fair value. The Company has elected the fair value option method of accounting for investments in certain hedge funds and, accordingly, reports these investments at fair value. The Company classifies certain investments in mutual funds included in Other Investments as trading securities and reports these investments at fair value. The Company has no material liabilities that are measured and reported at fair value.
The Company’s investments in Fixed Maturities that are classified as Level 1 in the two preceding tables primarily consist of U.S. Treasury Bonds and Notes. The Company’s investments in Equity Securities that are classified as Level 1 in the two preceding tables consist either of investments in publicly-traded common stocks or exchange traded funds. The Company’s investments in Fixed Maturities that are classified as Level 2 in the two preceding tables primarily consist of investments in corporate bonds, obligations of states and political subdivisions, and bonds and mortgage-backed securities of U.S. government agencies. The Company’s investments in Equity Securities that are classified as Level 2 in the two preceding tables primarily consist of investments in preferred stocks. The Company uses a leading, nationally recognized provider of market data and analytics to price the vast majority of the Company’s Level 2 measurements. The provider utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information. Because many fixed maturity securities do not trade on a daily basis, the provider’s evaluated pricing applications apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing to prepare evaluations. In addition, the provider uses model processes to develop prepayment and interest rate scenarios. The pricing provider’s models and processes also take into account market convention. For each asset class, teams of its evaluators gather information from market sources and integrate relevant credit information, perceived market movements and sector news into the evaluated pricing
The Company’s policy is to recognize transfers between levels as of the end of the reporting period. There were no transfers between Levels 1 and 2 or Levels 1 and 3 for the year ended December 31, 2014. The transfers into Level 3 and out of Level 3 for the year ended December 31, 2014 were due to changes in the availability of market observable inputs.
position, the Life Companies filed declaratory judgment actions challenging the application of such statutes to policies issued prior to the subject DMF Statute’s effective date:
In November 2012, certain of the Life Companies filed an action in Kentucky state court, asking the court to construe the Kentucky DMF Statute to apply only prospectively, i.e., only to life insurance policies issued in Kentucky on or after the effective date of the Kentucky DMF Statute, consistent with what the Life Companies believe are the requirements of applicable Kentucky statutory law, the Kentucky Constitution and the Contract Clause of the United States Constitution. In April 2013, the trial court held that the Kentucky DMF Statute does apply to life insurance policies issued before the statute’s January 1, 2013 effective date. The subject Life Companies appealed and in August 2014, in a unanimous opinion, the Kentucky Court of Appeals reversed the trial court and held that the Kentucky DMF statute fell within Kentucky’s statutory presumption against retroactive laws. Therefore, the Court ruled, the Kentucky DMF Statute can only apply to policies issued on or after January 1, 2013. The Kentucky Department of Insurance sought review of this ruling by the Supreme Court of Kentucky, which granted discretionary review in August 2015. In February 2016, the Department of Insurance requested that its appeal be dismissed and this request was granted, thus concluding the litigation. Consequently, the Kentucky DMF Statute is deemed to apply to policies issued on or after January 1, 2013.
In July 2013, certain of the Life Companies filed an action in state court in Maryland, asking the court to construe the Maryland DMF Statute to apply only prospectively, consistent with what the Life Companies believe are the requirements of Maryland’s common law presumption against retroactive application of new laws, the Maryland Constitution and the Contract Clause of the United States Constitution. The Maryland Insurance Administration (the “MIA”) filed a motion to dismiss, contending that the subject Life Companies were required to exhaust their administrative remedies before filing an action in court. In March 2014, the trial court granted the MIA’s motion and the Life Companies appealed that ruling. The Maryland appellate courts declined to stay enforcement of the Maryland DMF Statute pending the appeal and the Life Companies are complying with that statute while they pursue an appeal. The Life Companies’ appeal was denied by the Maryland Court of Special Appeals in October 2015 and the Life Companies have requested review by Maryland’s highest court, the Court of Appeals.
In October 2015, certain of the Life Companies filed a complaint for injunctive and other relief in state court in Illinois seeking a declaration that the Treasurer of the State of Illinois (the “IL Treasurer”) lacks the authority to compel those Life Companies to produce all in-force policy records to the Audit Firm, which is also a named defendant. In this litigation, the Life Companies further assert that life insurance proceeds become unclaimed property subject to escheat to Illinois five years after the insurer receives a claim and proof of death or the insured attains the mortality limiting age, and not five years after the date of the insured’s death. This complaint was filed in connection with the Treasurers’ Audit and in response to a demand by the IL Treasurer that the Life Companies produce all in-force policy records.
a single-state examination by the Illinois Department of Insurance (the “IDOI”). Insurance regulators from five additional states - California, Florida, New Hampshire, North Dakota and Pennsylvania - joined the examination in May 2013 (New Hampshire withdrew in 2014). In July 2013, the Life Companies received requests from the IDOI, as managing lead state for the Multi-State Exam, for a significant volume of information beyond that which the Life Companies had already produced, including the 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 litigation. This request by the IDOI prompted the litigation in Illinois and other states described below.
In September 2013, certain of the Life Companies filed declaratory judgment actions against insurance regulators in the states of California, Florida, Illinois and Pennsylvania, asking the courts in those states to declare that applicable law does not require life insurers to search a DMF to ascertain whether insureds are deceased. These complaints also asked the courts to declare that regulators in those states do not have the legal authority to (i) obtain life insurers’ policy records for the purpose of comparing those records against a DMF, and/or (ii) impose payment obligations on life insurers before a claim and due proof of death have been submitted by policy beneficiaries or the insured reaches the mortality limiting age specified therein. The action in California was filed as a cross-complaint to the CA Controller’s complaint and joined the California Insurance Commissioner and the Audit Firm as defendants. In December 2015, the Life Companies voluntarily dismissed the litigation against the IDOI after that department agreed to withdraw the request for records of all in-force policies and advised the Life Companies that it intended to proceed with a single-state market conduct exam without use of a DMF. At least one or more of the states remaining in the Multi-State Exam are expected to continue with the pending Multi-State Exam The actions against the insurance regulators in the states of Florida and Pennsylvania were stayed by agreement of the parties pending resolution of the action with the IDOI and may resume in 2016. Pending resolution of the litigation arising from the Multi-State Exam, the Life Companies have not produced their in-force policy records in connection with the Multi-State Exam.
How many states eventually enact laws, interpret existing laws or take other action to require the use of a DMF 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 DMF;
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 or other economic effect that it would recognize if the Life Companies were subjected to requirements of the types described in this Note on a retroactive basis.
With respect to the Company’s defined contribution plans, until November 4, 2014, one of the alternative investment choices afforded to participating employees was the Dreyfus Appreciation Fund, an open-end, diversified managed investment fund. FS&C provides investment management services to the Dreyfus Appreciation Fund as a sub-investment advisor. The Company does not compensate FS&C for services provided to the Dreyfus Appreciation Fund. Participants in the Company’s defined contribution plans had allocated $22.8 million for investment in the Dreyfus Appreciation Fund at December 31, 2013, representing 6% of the total amount invested in the Company’s defined contribution plans at such dates.