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Basis of Presentation and Accounting Policies

3 Months Ended

Mar. 31, 2023

Organization, Consolidation and Presentation of Financial Statements [Abstract]

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, life subsidiaries and a health subsidiary through the date of its sale of December 1, 2022 (collectively referred to herein as the “Company”).

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 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 three months ended March 31, 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 6 “Liability for Future Policyholder Benefits”, Note 7 “Deferred Policy Acquisition Costs”, Note 12 ”Other Comprehensive Loss and Accumulated Other Comprehensive Loss” and Note 15 “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 January 1, 2023. Other than discussed below, there were no adoptions of such accounting pronouncements during the three months ended March 31, 2023 that had a material impact on the Company’s Condensed Consolidated Financial Statements.

Guidance Adopted in 2023

The Company adopted Financial Accounting Standards Board 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 updated at least annually 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 also 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 Notes 6 and 7.

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 three months ended March 31, 2022 were as follows:


	Prior to Adoption		Effect of Adoption		Post- Adoption Balance
Earned Premiums	$	1,338.6	(18.6)		$	1,320.0
Policyholders’ Benefits and Incurred Losses and Loss Adjustment Expenses	$	1,153.4	(30.2)		$	1,123.2
Insurance Expenses	$	304.0	0.8		$	304.8
Income Tax Benefit	$	31.7	(2.3)		$	29.4
Net Loss	$	(94.8)	8.5		$	(86.3)

Net Loss Per Unrestricted Share:
Basic	$	(1.49)	$	0.13	$	(1.36)
Diluted	$	(1.49)	$	0.13	$	(1.36)

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) Income	$	(756.0)	241.1	$	(514.9)
Total Shareholders’ Equity	$	2,443.2	227.4	$	2,670.6

The effects of adoption of ASU 2018-12 on the Condensed Consolidated Statement of Comprehensive Loss for the three months ended March 31, 2022 were as follows:


	Prior to Adoption		Effect of Adoption	Post- Adoption Balance
Change in Discount Rate on Future Life Policyholder Benefits	$	—	562.3	$	562.3
Other Comprehensive Loss Before Income Taxes	$	(646.0)	562.3	$	(83.7)
Other Comprehensive Income Tax Benefit	$	135.6	(118.1)	$	17.5
Other Comprehensive Loss, Net of Taxes	$	(510.4)	444.2	$	(66.2)
Total Comprehensive Loss	$	(605.2)	452.7	$	(152.5)

Note 1 - Basis of Presentation and Accounting Policies (Continued)

The effects of adoption of ASU 2018-12 on the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2022 were as follows:


	Prior to Adoption		Effect of Adoption	Post- Adoption Balance
Cash Flows from Operating Activities:
Net Loss	$	(94.8)	8.5	$	(86.3)
Change in Deferred Policy Acquisition Costs	$	(2.4)	0.8	$	(1.6)
Change in Insurance Reserves	$	2.9	(11.6)	$	(8.7)
Change in Income Taxes	$	(30.5)	2.3	$	(28.2)
Net Cash Used in Operating Activities	$	(18.2)	—	$	(18.2)

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 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 are 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 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. Each quarter, the Company reviews and updates its estimate of cash flows expected over the lifetime of a group of contracts using actual historical experience and current future cash flow assumptions 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 underlying yield curve is held constant.

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.

Note 1 - Basis of Presentation and Accounting Policies (Continued)

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.

Property and Casualty Insurance Reserves

Property and casualty insurance reserve activity for the three months ended March 31, 2023 and 2022 was:


	Three Months Ended
(Dollars in Millions)	Mar 31, 2023		Mar 31, 2022
Property and Casualty Insurance Reserves:
Gross of Reinsurance at Beginning of Year	$	2,756.9	$	2,772.7
Less Reinsurance Recoverables at Beginning of Year	39.6		41.9
Property and Casualty Insurance Reserves, Net of Reinsurance at Beginning of Year	2,717.3		2,730.8

Incurred Losses and Loss Adjustment Expenses (“ LAE”) Related to:

Current Year	944.0		1,041.9



Prior Years	41.9		(2.7)
Total Incurred Losses and LAE	985.9		1,039.2
Paid Losses and LAE Related to:

Current Year	325.5		373.9



Prior Years	690.9		676.9
Total Paid Losses and LAE	1,016.4		1,050.8
Property and Casualty Insurance Reserves, Net of Reinsurance at End of Period	2,686.8		2,719.2
Plus Reinsurance Recoverables at End of Period	34.3		40.9
Property and Casualty Insurance Reserves - Gross of Reinsurance at End of Period	$	2,721.1	$	2,760.1

Property and casualty insurance reserves are estimated based on historical experience patterns and current economic trends. Actual loss experience and loss trends are likely to differ from these historical experience patterns and economic conditions. Loss experience and loss trends emerge over several years from the dates of loss inception. The Company monitors such emerging loss trends on a quarterly basis. Changes in such estimates are included in the Condensed Consolidated Statements of Loss in the period of change.

For the three months ended March 31, 2023, the Company increased its property and casualty insurance reserves by $41.9 million to recognize adverse development of loss and LAE reserves from prior accident years. Specialty personal automobile insurance loss and LAE reserves developed adversely by $22.9 million due primarily to higher than expected emergence in loss patterns related to third and fourth accident quarters of 2022 within the bodily injury and physical damage coverages. Commercial automobile insurance loss and LAE reserves developed adversely by $8.2 million due to higher than expected emergence in loss patterns related to 2021 and 2022 bodily injury coverages. Preferred personal automobile insurance loss and LAE reserves developed adversely by $3.4 million due to higher than expected emergence in loss patterns related to the third and fourth accident quarters of 2022 within the physical damage coverages. Homeowners loss and LAE reserves developed adversely by $5.5 million. Other lines loss and LAE reserves developed adversely by $1.9 million due to higher than expected loss patterns related to fourth quarter 2022 non-weather and weather related losses.

For the three months ended March 31, 2022, the Company decreased its property and casualty insurance reserves by $2.7 million to recognize favorable development of loss and LAE reserves from prior accident years. Specialty personal automobile insurance loss and LAE reserves developed favorably by $8.3 million due primarily to the emergence of more favorable loss patterns than expected for liability and physical damage insurance. Commercial automobile insurance loss and LAE reserves developed adversely by $5.2 million due primarily to the emergence of more adverse loss patterns than expected for liability insurance. Preferred personal automobile insurance loss and LAE reserves developed adversely by $1.6 million due primarily to the emergence of more adverse loss patterns than expected for liability insurance. Homeowners loss and LAE reserves developed favorably by $4.4 million due primarily to the emergence of more favorable loss patterns than expected. Other lines loss and LAE reserves developed adversely by $3.2 million due primarily to the emergence of more adverse loss patterns than expected for prior accident years.

The Company cannot predict whether loss and LAE reserves will develop favorably or adversely from the amounts reported in the Company’s Condensed Consolidated Financial Statements. The Company believes that any such development will not have

Note 5 - Property and Casualty Insurance Reserves (Continued)

a material effect on the Company’s Condensed Consolidated Shareholders’ Equity, but could have a material effect on the Company’s consolidated financial results for a given period.

Receivables from Policyholders - Allowance for Expected Credit Losses

The following table presents receivables from policyholders, net of the allowance for expected credit losses including a rollforward of changes in the allowance for expected credit losses for the three months ended March 31, 2023.


(Dollars in Millions)	Receivables from Policyholders, Net of Allowance for Expected Credit Losses		Allowance for Expected Credit Losses
Balance at Beginning of Year	$	1,286.6	$	13.1
Provision for Expected Credit Losses			11.0
Write-offs of Uncollectible Receivables from Policyholders			(12.8)
Balance at End of Period	$	1,344.0	$	11.3


(Dollars in Millions)	Receivables from Policyholders, Net of Allowance for Expected Credit Losses		Allowance for Expected Credit Losses
Balance at Beginning of Year	$	1,418.7	$	13.6
Provision for Expected Credit Losses			11.3
Write-offs of Uncollectible Receivables from Policyholders			(11.9)
Balance at End of Period	$	1,404.5	$	13.0

Liability for Future Policyholder Benefits

The following tables summarize balances and changes in the present value of expected net premiums, present value of expected future policyholder benefits and net liability for future policyholder benefits as of and for the three months ended March 31, 2023 and March 31, 2022:


	Present Value of Expected Net Premiums
	Mar 31, 2023		Mar 31, 2022
Balance, Beginning of Year	$	688.6	$	669.0

Beginning Balance at Original Discount Rate	$	728.9	$	599.8
Effect of Changes in Cash Flow Assumptions	—		—
Effect of Actual Variances from Expected Experience	0.7		12.5
Adjusted Beginning of Year Balance	729.6		612.3
Issuances	31.8		41.6
Interest Accrual	7.0		5.1
Net Premiums Collected	(23.9)		(21.1)
Ending Balance at Original Discount Rate	744.5		637.9
Effect of Changes in Discount Rate Assumptions	(22.1)		23.1
Balance, End of Period	$	722.4	$	661.0

	Present Value of Expected Future Policyholder Benefits
	Mar 31, 2023		Mar 31, 2022
Balance, Beginning of Year	$	3,561.0	$	4,933.1

Beginning Balance at Original Discount Rate	$	3,906.2	$	3,788.1
Effect of Changes in Cash Flow Assumptions	—		—
Effect of Actual Variances From Expected Experience	0.3		12.7
Adjusted Beginning of Year Balance	3,906.5		3,800.8
Issuances	31.8		41.6
Interest Accrual	42.4		40.8
Benefit Payments	(63.8)		(71.0)
Ending Balance at Original Discount Rate	3,916.9		3,812.2
Effect of Changes in Discount Rate Assumptions	(217.4)		536.5
Balance, End of Period	$	3,699.5	$	4,348.7

	Net Liability for Future Policyholder Benefits
	Mar 31, 2023		Mar 31, 2022
Net Liability for Future Policyholder Benefits	$	2,977.1	$	3,687.7
Less: Reinsurance Recoverable	—		—
Net Liability for Future Policyholder Benefits, After Reinsurance Recoverable	$	2,977.1	$	3,687.7

The weighted-average liability duration of the liability for future policyholder benefits as calculated under current rates is as follows:


	Mar 31, 2023	Mar 31, 2022
Weighted-Average Liability Duration of the Liability for Future Policyholder Benefits (Years)	14.9	17.1

Note 6 - Liability for Future Policyholder Benefits (Continued)

The reconciliation of the net liability for future policyholder benefits to Life and Health Insurance Reserves in the Condensed Consolidated Balance Sheets is as follows:


	Mar 31, 2023		Mar 31, 2022
Present Value of Expected Future Policyholder benefits	$	3,699.5	$	4,348.7
Less: Present Value of Expected Net Premiums	722.4		661.0
Net Liability for Future Policyholder benefits	2,977.1		3,687.7
Deferred Profit Liability	272.6		213.9
Other1	149.9		202.6
Total Life and Health Insurance Reserves	$	3,399.6	$	4,104.2

1Other primarily consists of Accident and Health and Universal Life reserves

The amounts of expected undiscounted future benefit payments, expected undiscounted future gross premiums and expected discounted future gross premiums, were as follows:


	Mar 31, 2023		Mar 31, 2022
Expected Future Benefit Payments, undiscounted	$	10,177.7	$	9,536.9
Expected Future Gross Premiums, undiscounted	$	4,464.2	$	3,808.5
Expected Future Gross Premiums, discounted	$	2,931.1	$	2,912.1

The amount of revenue and interest recognized in the Condensed Consolidated Statements of Loss is as follows:


	Three Months Ended
	Mar 31, 2023		Mar 31, 2022
Gross Premiums or Assessments	$	103.8	$	101.4
Interest Expense	$	35.4	$	35.6

The weighted-average interest rate is as follows:


	Mar 31, 2023		Mar 31, 2022
Interest Accretion Rate	4.55	%	4.55	%
Current Discount Rate	5.05	%	3.76	%

Significant assumption inputs to the calculation of the liability for future policyholder benefits for term life, permanent limited pay, permanent recurring pay, and guaranteed issue products include mortality, lapses, and discount rates (both accretion and current). In the first quarter of 2023, the Company reviewed all significant assumptions and did not make any changes to mortality and lapse assumptions as actual experience for mortality and lapse across these products was materially consistent with the underlying assumptions. Market data that underlies current discount rates was updated from December 31, 2022.