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Basis of Presentation and Accounting Policies | 9 Months Ended
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Sep. 30, 2023
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
Basis of Presentation and Accounting Policies | Basis of Presentation and Accounting Policies The unaudited Condensed Consolidated Financial Statements include the accounts of Kemper Corporation (“Kemper”) and its subsidiaries which include property and casualty subsidiaries, life subsidiaries, a health subsidiary through the date of its sale of December 1, 2022 (collectively referred to herein as the “Company”), and a variable interest entity (“VIE”) in which the Company is considered the primary beneficiary. The unaudited Condensed Consolidated Financial Statements included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) on a basis consistent with reporting interim financial information pursuant to the rules and regulations for Form 10-Q and Article 10 of Regulation S-X of the SEC and include the accounts of Kemper Corporation and its subsidiaries. All intercompany accounts and transactions have been eliminated. Certain financial information that is included in the annual financial statements, including certain financial statement footnote disclosures, prepared in accordance with GAAP is not required by the rules and regulations of the SEC for interim financial reporting and has been condensed or omitted. In the opinion of the Company’s management, the Condensed Consolidated Financial Statements include all adjustments necessary to fairly present the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements requires significant management estimates. Due to this factor and other factors, such as the seasonal nature of some portions of the insurance business, annualizing the results of operations for the nine months ended September 30, 2023 would not necessarily be indicative of the results expected for the full fiscal year. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Consolidated Financial Statements and related notes included in Kemper’s Annual Report for the year ended December 31, 2022, except for Note 7 “Liability for Future Policyholder Benefits”, Note 8 “Deferred Policy Acquisition Costs”, Note 13 “Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss” and Note 16 “Policyholder Obligations”, which were impacted due to the implementation of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2018-12 Financial Services-Insurance (Topic 944): Targeted Improvements to Accounting for Long-Duration Contracts. Adoption of New Accounting Guidance The Company has adopted all recently issued accounting pronouncements with effective dates prior to September 30, 2023. Other than discussed below, there were no adoptions of accounting pronouncements during the nine months ended September 30, 2023 that had a material impact on the Company’s Condensed Consolidated Financial Statements. Guidance Adopted in 2023 The Company adopted ASU 2018-12 for the liability for future policyholder benefits and deferred acquisition costs on a modified retrospective basis as of January 1, 2023, such that those balances were adjusted to conform to ASU 2018-12 on January 1, 2021. The new standard requires cash flow assumptions used to measure the liability for future policyholder benefits for nonparticipating traditional and limited pay long-duration contracts be reviewed at least annually, and if there is a change, updated with the recognition and remeasurement recorded in net income. It also requires the discount rate used in measuring the liability to be an upper-medium grade fixed-income instrument yield, which is to be updated at each reporting period, and recognized in other comprehensive income. ASU 2018-12 simplifies the amortization of deferred acquisition costs to a constant level basis over the expected term of the contract, requires all market risk benefits to be measured at fair value, and enhances certain presentation and disclosure requirements, as discussed in Note 7 and Note 8. As a result of the adoption of ASU 2018-12, beginning retained earnings was reduced by $25.1 million and Accumulated Other Comprehensive Income (“AOCI”) reduced by $1,030.3 million as of January 1, 2021. The table below presents the transition adjustment for the adoption of ASU 2018-12:
|  | Pre-Adoption Balance 12/31/2020 |  | Adjustments to AOCI |  | Adjustments to Retained Earnings |  | Post- Adoption Balance 1/1/2021
Retained Earnings |  | $ | 2,071.2 |  |  | — |  |  | (25.1) |  |  | $ | 2,046.1 |
AOCI |  | $ | 680.5 |  |  | (1,030.3) |  |  | — |  |  | $ | (349.8) |
Note 1 - Basis of Presentation and Accounting Policies (Continued) For the liability for future policyholder benefits, the net transition adjustment is related to the difference in the historical discount rates used pre-transition and the discount rate at December 31, 2020. At transition, there were no adjustments related to premium deficiencies, as the balance is only applicable to Kemper’s universal life contracts which are stated at account value. The effects of adoption of ASU 2018-12 on the Condensed Consolidated Statement of Loss for the nine months ended September 30, 2022 were as follows:
|  | Prior to Adoption |  | Effect of Adoption |  | Post- Adoption Balance
Earned Premiums |  | $ | 3,999.3 |  |  | (50.8) |  |  | $ | 3,948.5 |
Policyholders’ Benefits and Incurred Losses and Loss Adjustment Expenses |  | $ | 3,426.1 |  |  | (66.5) |  |  | $ | 3,359.6 |
Insurance Expenses |  | $ | 913.0 |  |  | — |  |  | $ | 913.0 |
Income Tax Benefit |  | $ | 68.1 |  |  | (3.3) |  |  | $ | 64.8 |
Net Loss attributable to Kemper Corporation |  | $ | (245.7) |  |  | 12.4 |  |  | $ | (233.3) |
Net Loss Per Unrestricted Share attributable to Kemper Corporation: |  |  |  |  |  |
Basic |  | $ | (3.85) |  |  | $ | 0.19 |  |  | $ | (3.66) |
Diluted |  | $ | (3.85) |  |  | $ | 0.19 |  |  | $ | (3.66) |
The effects of adoption of ASU 2018-12 on the Condensed Consolidated Statement of Loss for the three months ended September 30, 2022 were as follows:
|  | Prior to Adoption |  | Effect of Adoption |  | Post- Adoption Balance
Earned Premiums |  | $ | 1,307.0 |  |  | (16.1) |  |  | $ | 1,290.9 |
Policyholders’ Benefits and Incurred Losses and Loss Adjustment Expenses |  | $ | 1,102.4 |  |  | (17.1) |  |  | $ | 1,085.3 |
Insurance Expenses |  | $ | 301.3 |  |  | (0.8) |  |  | $ | 300.5 |
Income Tax Benefit |  | $ | 13.4 |  |  | (0.4) |  |  | $ | 13.0 |
Net Loss attributable to Kemper Corporation |  | $ | (76.2) |  |  | 1.4 |  |  | $ | (74.8) |
Net Loss Per Unrestricted Share attributable to Kemper Corporation: |  |  |  |  |  |
Basic |  | $ | (1.19) |  |  | $ | 0.02 |  |  | $ | (1.17) |
Diluted |  | $ | (1.19) |  |  | $ | 0.02 |  |  | $ | (1.17) |
The effects of adoption of ASU 2018-12 on the Condensed Consolidated Balance Sheet as of December 31, 2022 were as follows:
|  | Prior to Adoption |  | Effect of Adoption |  | Post- Adoption Balance
Deferred Policy Acquisition Costs |  | $ | 625.6 |  |  | 10.0 |  |  | $ | 635.6 |
Deferred Income Tax Assets |  | $ | 189.4 |  |  | (60.4) |  |  | $ | 129.0 |
Total Assets |  | $ | 13,364.0 |  |  | (50.4) |  |  | $ | 13,313.6 |
Life and Health Insurance Reserves |  | $ | 3,554.0 |  |  | (277.8) |  |  | $ | 3,276.2 |
Total Liabilities |  | $ | 10,920.8 |  |  | (277.8) |  |  | $ | 10,643.0 |
Retained Earnings |  | $ | 1,380.1 |  |  | (13.7) |  |  | $ | 1,366.4 |
Accumulated Other Comprehensive Loss |  | $ | (756.0) |  |  | 241.1 |  |  | $ | (514.9) |
Total Shareholders’ Equity attributable to Kemper Corporation |  | $ | 2,443.2 |  |  | 227.4 |  |  | $ | 2,670.6 |
Note 1 - Basis of Presentation and Accounting Policies (Continued) The effects of adoption of ASU 2018-12 on the Condensed Consolidated Statement of Comprehensive Loss for the nine months ended September 30, 2022 were as follows:
|  | Prior to Adoption |  | Effect of Adoption |  | Post- Adoption Balance
Change in Discount Rate on Future Life Policyholder Benefits |  | $ | — |  |  | 1,420.9 |  |  | $ | 1,420.9 |
Other Comprehensive Loss Before Income Taxes |  | $ | (1,638.9) |  |  | 1,420.9 |  |  | $ | (218.0) |
Other Comprehensive Income Tax Benefit |  | $ | 344.2 |  |  | (298.4) |  |  | $ | 45.8 |
Other Comprehensive Loss, Net of Taxes |  | $ | (1,294.7) |  |  | 1,122.5 |  |  | $ | (172.2) |
Total Comprehensive Loss |  | $ | (1,540.4) |  |  | 1,134.9 |  |  | $ | (405.5) |
The effects of adoption of ASU 2018-12 on the Condensed Consolidated Statement of Comprehensive Loss for the three months ended September 30, 2022 were as follows:
|  | Prior to Adoption |  | Effect of Adoption |  | Post- Adoption Balance
Change in Discount Rate on Future Life Policyholder Benefits |  | $ | — |  |  | 330.9 |  |  | $ | 330.9 |
Other Comprehensive Loss Before Income Taxes |  | $ | (412.5) |  |  | 330.9 |  |  | $ | (81.6) |
Other Comprehensive Income Tax Benefit |  | $ | 86.7 |  |  | (69.5) |  |  | $ | 17.2 |
Other Comprehensive Loss, Net of Taxes |  | $ | (325.8) |  |  | 261.4 |  |  | $ | (64.4) |
Total Comprehensive Loss |  | $ | (402.0) |  |  | 262.8 |  |  | $ | (139.2) |
The effects of adoption of ASU 2018-12 on the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2022 were as follows:
|  | Prior to Adoption |  | Effect of Adoption |  | Post- Adoption Balance
Cash Flows from Operating Activities: |  |  |  |  |  |
Net Loss |  | $ | (245.7) |  |  | 12.4 |  |  | $ | (233.3) |
Change in Deferred Policy Acquisition Costs |  | $ | 4.2 |  |  | — |  |  | $ | 4.2 |
Change in Insurance Reserves |  | $ | (9.3) |  |  | (15.7) |  |  | $ | (25.0) |
Change in Income Taxes |  | $ | (66.2) |  |  | 3.3 |  |  | $ | (62.9) |
Net Cash Used in Operating Activities |  | $ | (170.1) |  |  | — |  |  | $ | (170.1) |
Guidance Not Yet Adopted In March 2023, the FASB issued ASU 2023-02 Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, which expands the use of the proportional amortization method of accounting to equity investments in other tax credit structures that meet certain criteria. The proportional amortization method results in the tax credit investment being amortized in proportion to the allocation of tax credits and other tax benefits in each period, and a net presentation within the income tax line item. ASU 2023-02 is effective for annual periods beginning after December 15, 2023 and interim periods within those annual periods. The Company is currently evaluating the impact of this guidance on its financial statements. Significant Accounting Policies Related to ASU 2018-12 The below outlines those significant accounting policies related to ASU 2018-12 that were effective January 1, 2023. Liability for Future Policyholder Benefits A liability for future policyholder benefits, which is the present value of estimated future policyholder benefits to be paid to or on behalf of policyholders and certain related expenses, less the present value of estimated future net premiums to be collected from policyholders, is accrued as premium revenue is recognized. The liability is estimated using current assumptions that Note 1 - Basis of Presentation and Accounting Policies (Continued) include discount rate, mortality, lapses and expenses. These current assumptions are based on judgments that consider the Company’s historical experience, industry data, and other factors. The liability is adjusted for differences between actual and expected experience. The Company reviews and updates its estimate of cash flows expected over the lifetime of a group of contracts using actual historical experience quarterly and current future cash flow assumptions at least annually to calculate its revised net premium ratio. The revised net premium ratios are then used to calculate an updated liability for future policyholder benefits for the current reporting period, discounted at the original contract issuance discount rate. The Company has elected to use expense assumptions that are locked in at contract inception and are not subsequently reviewed or updated. Resulting changes in the liability due to differences in actual versus expected experience, changes in current cash flow assumptions, and prefunding and payout of benefits compared to the carrying amount of the liability as of that same date are recorded as a separate component of benefit expense in the Condensed Consolidated Statements of Loss. The current discount rate assumption is an equivalent spot rate curve of annually compounded rates at monthly increments that is derived based on A-credit rated fixed-income instruments reflecting the duration characteristics of the liability. The Company utilizes published corporate yield curves from Bloomberg’s BVAL Investment Grade Corporate Sector curve. The current discount rate assumption is updated quarterly and used to remeasure the liability at the reporting date, with the resulting change reflected in Other Comprehensive Income (Loss). For liability cash flows that are projected beyond the maximum observable point on the yield curve, the yield grades to an ultimate forward rate. Deferred Profit Liability For limited-payment products, gross premiums received in excess of net premiums are deferred at initial recognition as a deferred profit liability (“DPL”). Gross premiums are measured using assumptions consistent with those used in the measurement of the liability for future policyholder benefits, including discount rate, mortality, lapses, and expenses. The DPL is amortized and recognized as premium revenue in proportion to insurance in force for nonparticipating limited-payment contracts. Interest is accreted on the balance of the DPL using the discount rate determined at contract issuance. The Company reviews and updates its estimates of cash flows for the DPL at the same time as the estimates of cash flows for the liability for future policyholder benefits. When cash flows are updated, the updated estimates are used to recalculate the DPL at contract issuance. The recalculated DPL as of the beginning of the current reporting period is compared to the carrying amount of the DPL as of the beginning of the current reporting period, and any difference is recognized as either an increase or decrease to Earned Premiums. Deferred Policy Acquisition Costs Deferred costs are grouped by contract type and issue year into cohorts consistent with the grouping used in estimating the associated liability. These deferred costs are amortized on a constant level basis for grouped contracts over the expected term of the related contracts to approximate straight-line amortization. The expected term of the contract used for amortization is determined using mortality and termination assumptions that are based on the Company’s experience, industry data, and other factors and are consistent with those used for the liability for future policyholder benefits. If those projected assumptions change in future periods, they will be reflected in the straight-line amortization horizon at that time. Unexpected terminations, due to higher mortality and termination experience than expected, are recognized in the current period as a reduction of the capitalized balances. Amortization of deferred policy acquisition costs is included in Insurance Expenses in the Condensed Consolidated Statements of Loss.

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