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Kemper Corporation Reports Third Quarter 2012 Results

Kemper Specialty reported net operating income of $2.7 million for the third quarter of 2012, compared to $5.7 million in 2011. Kemper Specialty's underlying combined ratio was 103.2 percent in the third quarter of 2012, an increase of 3.8 percentage points, driven by the impact of current year development and a higher expense ratio. Excluding the change in current year development, the total underlying loss ratio was relatively flat, with improved personal auto results driven by higher average premium, offset by an increase in the commercial auto underlying loss ratio driven by higher frequency. The insurance expense ratio increased 1.0 percentage point, largely related to technology initiatives.

Kemper Direct reported net operating income of $1.5 million for the third quarter of 2012, compared to a net operating loss of $1.7 million in 2011. The segment continued to reduce under-performing business as it explores strategic options. The current quarter results included $0.3 million of catastrophe losses, compared to $1.4 million in 2011. Both periods included $3.5 million of favorable reserve development. The underlying combined ratio improved 1.1 percentage points as lower marketing expense was partially offset by a higher underlying loss ratio.

Life and Health Insurance reported net operating income of $19.2 million for the third quarter of 2012, compared to $19.7 million in 2011. Results included $1.8 million higher catastrophe losses, $1.0 million higher insurance expenses and $1.7 million higher policyholder benefits for life insurance, which were partially offset by $3.3 million higher net investment income and $0.8 million lower non-catastrophe losses.

Corporate and Other net operating loss decreased $1.1 million for the third quarter of 2012, primarily related to $1.2 million higher unallocated investment income, offset by $0.5 million higher retirement benefits.

Unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2012 and 2011 are presented below:

  Three Months Ended   Nine Months Ended
(Dollars in millions, except per share amounts) Sep 30,2012   Sep 30,2011 Sep 30,2012   Sep 30,2011
Revenues:
Earned Premiums $ 527.3 $ 543.0 $ 1,586.3 $ 1,637.1
Net Investment Income 70.4 58.6 223.0 222.7
Other Income 0.2 0.4 0.6 0.8
Net Realized Gains (Losses) on Sales of Investments 50.9 (4.2 ) 59.9 27.8
Other-than-temporary Impairment Losses:
Total Other-than-temporary Impairment Losses (3.2 ) (5.0 ) (4.1 ) (6.7 )
Portion of Losses Recognized in Other Comprehensive Income        
Net Impairment Losses Recognized in Earnings (3.2 ) (5.0 ) (4.1 ) (6.7 )
Total Revenues 645.6   592.8   1,865.7   1,881.7  
Expenses:
Policyholders’ Benefits and Incurred Losses and Loss Adjustment Expenses 368.7 399.6 1,169.1 1,269.0
Insurance Expenses 172.7 176.8 502.8 513.5
Interest and Other Expenses 22.7   21.4   65.4   62.0  
Total Expenses 564.1   597.8   1,737.3   1,844.5  
Income (Loss) from Continuing Operations before Income Taxes 81.5 (5.0 ) 128.4 37.2
Income Tax Benefit (Expense) (25.9 ) 6.1   (34.9 ) (0.5 )
Income from Continuing Operations 55.6 1.1 93.5 36.7
Income from Discontinued Operations   0.9   8.0   13.5  
Net Income $ 55.6   $ 2.0   $ 101.5   $ 50.2  
 
Income from Continuing Operations Per Unrestricted Share:
Basic $ 0.95   $ 0.01   $ 1.57   $ 0.61  
Diluted $ 0.95   $ 0.01   $ 1.56   $ 0.61  
 
Net Income Per Unrestricted Share:
Basic $ 0.95   $ 0.03   $ 1.71   $ 0.83  
Diluted $ 0.95   $ 0.03   $ 1.70   $ 0.83  
 
Dividends Paid to Shareholders Per Share $ 0.24   $ 0.24   $ 0.72   $ 0.72  
 

Unaudited business segment revenues for the three and nine months ended September 30, 2012 and 2011 are presented below:

  Three Months Ended   Nine Months Ended
(Dollars in Millions) Sep 30,2012   Sep 30,2011 Sep 30,2012   Sep 30,2011
REVENUES
Kemper Preferred:
Earned Premiums $ 222.9 $ 216.5 $ 655.9 $ 642.8
Net Investment Income 10.8 8.2 33.6 37.8
Other Income 0.1   0.1   0.3   0.2  
Total Kemper Preferred 233.8   224.8   689.8   680.8  
Kemper Specialty:
Earned Premiums 103.9 111.0 317.3 336.7
Net Investment Income 4.5 3.7 14.4 17.5
Other Income 0.1   0.2   0.2   0.4  
Total Kemper Specialty 108.5   114.9   331.9   354.6  
Kemper Direct:
Earned Premiums 40.3 54.4 131.2 171.8
Net Investment Income 3.4 2.8 10.7 13.6
Other Income   0.1     0.1  
Total Kemper Direct 43.7   57.3   141.9   185.5  
Life and Health Insurance:
Earned Premiums 160.2 161.1 481.9 485.8
Net Investment Income 48.1 42.5 153.5 147.3
Other Income     0.1   0.1  
Total Life and Health Insurance 208.3   203.6   635.5   633.2  
Total Segment Revenues 594.3 600.6 1,799.1 1,854.1
Net Realized Gains (Losses) on the Sales of Investments 50.9 (4.2 ) 59.9 27.8
Net Impairment Losses Recognized in Earnings (3.2 ) (5.0 ) (4.1 ) (6.7 )
Other 3.6   1.4   10.8   6.5  
Total Revenues $ 645.6   $ 592.8   $ 1,865.7   $ 1,881.7  
 
KEMPER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions)

(Unaudited)

Sep 30,2012   Dec 31,2011
Assets:
Investments:
Fixed Maturities at Fair Value $ 4,725.6 $ 4,773.4
Equity Securities at Fair Value 545.7 397.3
Equity Method Limited Liability Investments at Cost Plus Cumulative Undistributed Earnings 267.3 306.3
Short-term Investments at Cost which Approximates Fair Value 297.3 247.4
Other Investments 500.1   498.3
Total Investments 6,336.0   6,222.7
Cash 318.7 251.2
Receivables from Policyholders 385.6 379.2
Other Receivables 207.6 218.7
Deferred Policy Acquisition Costs 306.8 294.0
Goodwill 311.8 311.8
Current and Deferred Income Tax Assets 0.1 6.4
Other Assets 254.2   250.7
Total Assets $ 8,120.8   $ 7,934.7
Liabilities and Shareholders’ Equity:
Insurance Reserves:
Life and Health $ 3,149.8 $ 3,102.7
Property and Casualty 981.8   1,029.1
Total Insurance Reserves 4,131.6   4,131.8
Unearned Premiums 674.3 666.2
Liabilities for Income Taxes 59.1 6.2
Notes Payable at Amortized Cost 611.2 610.6
Accrued Expenses and Other Liabilities 440.1   403.3
Total Liabilities 5,916.3   5,818.1
Shareholders’ Equity:
Common Stock 5.8 6.0
Paid-in Capital 722.8 743.9
Retained Earnings 1,130.8 1,108.7
Accumulated Other Comprehensive Income 345.1   258.0
Total Shareholders’ Equity 2,204.5   2,116.6
Total Liabilities and Shareholders’ Equity $ 8,120.8   $ 7,934.7
 

Unaudited selected financial information for the Kemper Preferred segment follows:

  Three Months Ended   Nine Months Ended
(Dollars in Millions) Sep 30,2012   Sep 30,2011 Sep 30,2012   Sep 30,2011
 

Results of Operations

 
Net Premiums Written $ 237.9   $ 233.3   $ 677.9   $ 657.6  
Earned Premiums:
Automobile $ 130.5 $ 128.5 $ 385.1 $ 383.0
Homeowners 78.4 74.3 229.4 219.6
Other Personal 14.0   13.7   41.4   40.2  
Total Earned Premiums 222.9 216.5 655.9 642.8
Net Investment Income 10.8 8.2 33.6 37.8
Other Income 0.1   0.1   0.3   0.2  
Total Revenues 233.8   224.8   689.8   680.8  
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE 154.0 148.9 448.8 435.8
Catastrophe Losses and LAE 9.4 40.9 62.7 137.8
Prior Years:
Non-catastrophe Losses and LAE (0.8 ) (7.9 ) (3.1 ) (11.6 )
Catastrophe Losses and LAE (1.6 ) (1.5 ) (6.0 ) (3.8 )
Total Incurred Losses and LAE 161.0 180.4 502.4 558.2
Insurance Expenses 62.4   60.5   183.0   179.1  
Operating Profit (Loss) 10.4 (16.1 ) 4.4 (56.5 )
Income Tax Benefit (Expense) (2.0 ) 7.8   4.1   26.2  
Segment Net Operating Income (Loss) $ 8.4   $ (8.3 ) $ 8.5   $ (30.3 )
 

Ratios Based On Earned Premiums

 
Current Year Non-catastrophe Losses and LAE Ratio 69.1 % 68.7 % 68.4 % 67.8 %
Current Year Catastrophe Losses and LAE Ratio 4.2 18.9 9.6 21.4
Prior Years Non-catastrophe Losses and LAE Ratio (0.4 ) (3.6 ) (0.5 ) (1.8 )
Prior Years Catastrophe Losses and LAE Ratio (0.7 ) (0.7 ) (0.9 ) (0.6 )
Total Incurred Loss and LAE Ratio 72.2 83.3 76.6 86.8
Incurred Expense Ratio 28.0   27.9   27.9   27.9  
Combined Ratio 100.2 % 111.2 % 104.5 % 114.7 %
 

Underlying Combined Ratio

 
Current Year Non-catastrophe Losses and LAE Ratio 69.1 % 68.7 % 68.4 % 67.8 %
Incurred Expense Ratio 28.0   27.9   27.9   27.9  
Underlying Combined Ratio 97.1 % 96.6 % 96.3 % 95.7 %
 

Non-GAAP Measure Reconciliation

 
Underlying Combined Ratio 97.1 % 96.6 % 96.3 % 95.7 %
Current Year Catastrophe Losses and LAE Ratio 4.2 18.9 9.6 21.4
Prior Years Non-catastrophe Losses and LAE Ratio (0.4 ) (3.6 ) (0.5 ) (1.8 )
Prior Years Catastrophe Losses and LAE Ratio (0.7 ) (0.7 ) (0.9 ) (0.6 )
Combined Ratio as Reported 100.2 % 111.2 % 104.5 % 114.7 %
 

Unaudited selected financial information for the Kemper Specialty segment follows:

  Three Months Ended   Nine Months Ended
(Dollars in Millions) Sep 30,2012   Sep 30,2011 Sep 30,2012   Sep 30,2011
 

Results of Operations

 
Net Premiums Written $ 103.9   $ 109.3   $ 320.2   $ 338.2  
Earned Premiums:
Personal Automobile $ 92.9 $ 100.9 $ 285.6 $ 306.9
Commercial Automobile 11.0   10.1   31.7   29.8  
Total Earned Premiums 103.9 111.0 317.3 336.7
Net Investment Income 4.5 3.7 14.4 17.5
Other Income 0.1   0.2   0.2   0.4  
Total Revenues 108.5   114.9   331.9   354.6  
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE 84.2 86.8 259.4 270.9
Catastrophe Losses and LAE 0.9 0.7 4.7 3.7
Prior Years:
Non-catastrophe Losses and LAE (2.9 ) (3.2 ) (2.5 ) (7.0 )
Catastrophe Losses and LAE     0.1   0.1  
Total Incurred Losses and LAE 82.2 84.3 261.7 267.7
Insurance Expenses 23.1   23.5   67.7   68.0  
Operating Profit 3.2 7.1 2.5 18.9
Income Tax Benefit (Expense) (0.5 ) (1.4 ) 1.5   (3.5 )
Segment Net Operating Income $ 2.7   $ 5.7   $ 4.0   $ 15.4  
 

Ratios Based On Earned Premiums

 
Current Year Non-catastrophe Losses and LAE Ratio 81.0 % 78.2 % 81.8 % 80.5 %
Current Year Catastrophe Losses and LAE Ratio 0.9 0.6 1.5 1.1
Prior Years Non-catastrophe Losses and LAE Ratio (2.8 ) (2.9 ) (0.8 ) (2.1 )
Prior Years Catastrophe Losses and LAE Ratio        
Total Incurred Loss and LAE Ratio 79.1 75.9 82.5 79.5
Incurred Expense Ratio 22.2   21.2   21.3   20.2  
Combined Ratio 101.3 % 97.1 % 103.8 % 99.7 %
 

Underlying Combined Ratio

 
Current Year Non-catastrophe Losses and LAE Ratio 81.0 % 78.2 % 81.8 % 80.5 %
Incurred Expense Ratio 22.2   21.2   21.3   20.2  
Underlying Combined Ratio 103.2 % 99.4 % 103.1 % 100.7 %
 

Non-GAAP Measure Reconciliation

 
Underlying Combined Ratio 103.2 % 99.4 % 103.1 % 100.7 %
Current Year Catastrophe Losses and LAE Ratio 0.9 0.6 1.5 1.1
Prior Years Non-catastrophe Losses and LAE Ratio (2.8 ) (2.9 ) (0.8 ) (2.1 )
Prior Years Catastrophe Losses and LAE Ratio        
Combined Ratio as Reported 101.3 % 97.1 % 103.8 % 99.7 %
 

Unaudited selected financial information for the Kemper Direct segment follows:

  Three Months Ended   Nine Months Ended
(Dollars in Millions) Sep 30,2012   Sep 30,2011 Sep 30,2012   Sep 30,2011
 

Results of Operations

 
Net Premiums Written $ 35.9   $ 52.0   $ 115.5   $ 163.5  
Earned Premiums:
Automobile $ 37.9 $ 52.0 $ 123.9 $ 164.8
Homeowners 2.4 2.3 7.2 6.8
Other Personal   0.1   0.1   0.2  
Total Earned Premiums 40.3 54.4 131.2 171.8
Net Investment Income 3.4 2.8 10.7 13.6
Other Income   0.1     0.1  
Total Revenues 43.7   57.3   141.9   185.5  
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE 33.8 44.9 111.5 145.7
Catastrophe Losses and LAE 0.4 2.2 4.8 6.2
Prior Years:
Non-catastrophe Losses and LAE (5.3 ) (5.3 ) (11.3 ) (6.3 )
Catastrophe Losses and LAE (0.1 )   (0.2 ) 0.4  
Total Incurred Losses and LAE 28.8 41.8 104.8 146.0
Insurance Expenses 13.3   19.3   44.0   59.1  
Operating Profit (Loss) 1.6 (3.8 ) (6.9 ) (19.6 )
Income Tax Benefit (Expense) (0.1 ) 2.1   4.2   9.2  
Segment Net Operating Income (Loss) $ 1.5   $ (1.7 ) $ (2.7 ) $ (10.4 )
 

Ratios Based On Earned Premiums

 
Current Year Non-catastrophe Losses and LAE Ratio 83.9 % 82.5 % 85.0 % 84.9 %
Current Year Catastrophe Losses and LAE Ratio 1.0 4.0 3.7 3.6
Prior Years Non-catastrophe Losses and LAE Ratio (13.2 ) (9.7 ) (8.6 ) (3.7 )
Prior Years Catastrophe Losses and LAE Ratio (0.2 )   (0.2 ) 0.2  
Total Incurred Loss and LAE Ratio 71.5 76.8 79.9 85.0
Incurred Expense Ratio 33.0   35.5   33.5   34.4  
Combined Ratio 104.5 % 112.3 % 113.4 % 119.4 %
 

Underlying Combined Ratio

 
Current Year Non-catastrophe Losses and LAE Ratio 83.9 % 82.5 % 85.0 % 84.9 %
Incurred Expense Ratio 33.0   35.5   33.5   34.4  
Underlying Combined Ratio 116.9 % 118.0 % 118.5 % 119.3 %
 

Non-GAAP Measure Reconciliation

 
Underlying Combined Ratio 116.9 % 118.0 % 118.5 % 119.3 %
Current Year Catastrophe Losses and LAE Ratio 1.0 4.0 3.7 3.6
Prior Years Non-catastrophe Losses and LAE Ratio (13.2 ) (9.7 ) (8.6 ) (3.7 )
Prior Years Catastrophe Losses and LAE Ratio (0.2 )   (0.2 ) 0.2  
Combined Ratio as Reported 104.5 % 112.3 % 113.4 % 119.4 %
 

Unaudited selected financial information for the Life and Health Insurance segment follows:

  Three Months Ended   Nine Months Ended
(Dollars in Millions) Sep 30,2012   Sep 30,2011 Sep 30,2012   Sep 30,2011
 

Results of Operations

 
Earned Premiums:
Life $ 98.4 $ 98.0 $ 296.0 $ 297.1
Accident and Health 41.3 41.9 124.2 124.6
Property 20.5   21.2   61.7   64.1  
Total Earned Premiums 160.2 161.1 481.9 485.8
Net Investment Income 48.1 42.5 153.5 147.3
Other Income     0.1   0.1  
Total Revenues 208.3   203.6   635.5   633.2  
Policyholders’ Benefits and Incurred Losses and LAE 96.7 93.0 300.2 297.1
Insurance Expenses 82.2   80.7   232.6   231.5  
Operating Profit 29.4 29.9 102.7 104.6
Income Tax Expense (10.2 ) (10.2 ) (36.2 ) (36.9 )
Segment Net Operating Income $ 19.2   $ 19.7   $ 66.5   $ 67.7  

Use of Non-GAAP Financial Measures

Consolidated Net Operating Income

Consolidated Net Operating Income is an after-tax, non-GAAP financial measure computed by excluding from income from continuing operations the after-tax impact of 1) net realized gains (losses) on sales of investments, 2) net impairment losses recognized in earnings related to investments and 3) other significant non-recurring or infrequent items that may not be indicative of ongoing operations. Significant non-recurring items are excluded when (a) the nature of the charge or gain is such that it is reasonably unlikely to recur within two years, and (b) there has been no similar charge or gain within the prior two years. The most directly comparable GAAP financial measure is income from continuing operations.

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