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 $25.6 million in 2017, compared to $23.7 million in 2016.
Policyholders’ Benefits and Incurred Losses and LAE increased by $80.3 million in 2016, compared to 2015. Excluding the impact of using death verification databases described above, Policyholders’ Benefits and Incurred Losses and LAE increased by $2.5 million due primarily to higher policyholders’ benefits on life insurance, partially offset by lower incurred losses and LAE on property insurance and accident and health insurance. Insurance Expenses in the Life & Health Insurance segment decreased by $6.1 million due primarily to lower legal costs, partially offset by higher agent and field management compensation costs for KHSC and the impact of an adjustment made in 2015 to deferred policy acquisition costs for Reserve National. Segment Net Operating Income in the Life & Health Insurance segment was $30.3 million for the year ended December 31, 2016, compared to $71.7 million in 2015.
Earned premiums on property insurance decreased by $1.6 million in 2017, compared to 2016, due primarily to a lower volume of insurance. Incurred losses and LAE on property insurance were $24.6 million, or 33.9% of property insurance earned premiums, in 2017, compared to $25.0 million, or 33.7% of property insurance earned premiums, in 2016. Underlying losses and LAE on property insurance were $17.8 million, or 24.5% of property insurance earned premiums, in 2017, compared to $19.6 million, or 26.4% of property insurance earned premiums, in 2016, and decreased due to a lower frequency of claims. Catastrophe losses and LAE (excluding development), net of reinsurance recoveries from the Florida Hurricane Catastrophe Fund (the “FHCF”) were $5.9 million in 2017, compared to $5.5 million in 2016. Catastrophe losses and LAE, net of reinsurance from the FHCF, included catastrophe losses and LAE of $3.2 million from Hurricanes Harvey and Irma. Adverse loss and LAE reserve development was $0.9 million in 2017, compared to favorable development of $0.1 million in 2016. Insurance expenses decreased $2.4 million in 2017, compared to 2016, due primarily to lower commission expense due in part to a lower volume of earned premium.
The Company did not recognize any impairment losses related to Investments in Real Estate in the Consolidated Statements of Income for the years ended December 31, 2017 or December 31, 2015.
Expenses for the years ended December 31, 2017, 2016 and 2015 were:
The outstanding principal balance, net of unamortized issuance costs, of Kemper’s debt was $592.3 million at December 31, 2017, of which $450.0 million is scheduled to mature on February 15, 2025 (the “2025 Senior Notes”) and $150.0 million is scheduled to mature on February 27, 2054 (the “2054 Debt”). The 2054 Debt was issued in 2014 and is subordinated to the 2025 Senior Notes. 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.
Net Cash Provided by Operating Activities increased by $0.1 million for the year ended December 31, 2017, compared to 2016. Net Cash Provided by Operating Activities increased by $25.5 million for the year ended December 31, 2016, compared to 2015.
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 $105.4 million for the year ended December 31, 2017, compared to $238.1 million in 2016. Net cash provided by dispositions of short-term investments was $39.4 million for the year ended December 31, 2017, compared to net cash used by acquisitions of short term investments of $18.0 million in 2016. Fixed Maturities investing activities used net cash of $181.9 million for the year ended December 31, 2017, compared to $318.0 million in 2016. Equity Securities investing activities used net cash of $0.7 million for the year ended December 31, 2017, compared to providing net cash of $68.8 million in 2016. Equity Method Limited Liability Investments investing activities provided net cash of $20.2 million for the year ended December 31, 2017, compared to $6.4 million in 2016. Net cash provided by Fair Value Option Investments investing activities was $35.2 million for the year ended December 31, 2017, compared to $51.2 million in 2016. The Company did not use cash to purchase Corporate-owned Life Insurance during the year ended December 31, 2017, compared to purchases of $7.5 million in the year ended December 31, 2016.
The fair value of the Company’s investments measured and reported at fair value was $5,992.9 million at December 31, 2017, of which $5,190.3 million, or 87%, were investments that were based on quoted market prices or significant value drivers that are observable, $556.6 million, or 9%, were investments where at least one significant value driver was unobservable and $246.0 million or 4% were investments for which fair value is measured using the net asset value per share practical expedient. 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, 2017 due to changing market conditions and limitations inherent in the estimation process.
The Company’s actuaries generally estimate reserves at least quarterly for most product lines and/or coverage levels using accident quarters spanning 10 or more years, depending on the size of the product line and/or coverage level or emerging issues relating to them. The Company’s actuaries use a variety of generally accepted actuarial loss reserving estimation methodologies, including, but not limited to, the following:
The Company accounts for the present value of the future profits embedded in Property and Casualty Insurance Broker Relationships Acquired (“P&C Broker Relationships”) based on the present value of estimated future cash flows from the broker relationships acquired. P&C Broker Relationships was $15.6 million and $16.8 million at December 31, 2017 and 2016, respectively. P&C Broker Relationships is amortized on a straight-line basis over 15 years. P&C Broker 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.
In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which the Company early adopted in the first quarter of 2017. ASU 2017-08 shortens the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. No change is required for securities held at a discount, which will continue to be amortized to maturity. The Company holds a large number of debt securities for which prepayments are probable and the timing and amount of prepayments can be reasonably estimated. As allowed under GAAP in effect prior to the issuance of ASU 2017-08, the Company already considered such estimates of future principal prepayments in the calculation of the constant effective yield necessary in applying the interest method. Accordingly, adoption of ASU 2017-08 did not have a material impact on the Company’s financial statements.
The Company’s actuaries’ quarterly selections are summed by product and/or coverage levels to create the actuarial indication of the ultimate losses and LAE. Paid amounts are then subtracted from the ultimates to compute the reserves for property and casualty insurance losses and LAE. These results are reviewed by the Company’s corporate actuary and corporate management who apply their collective judgment and determine the appropriate estimated level of reserves to record. Numerous factors are considered in this determination process, including, but not limited to, the assessed reliability of key loss trends and assumptions that may be significantly influencing the current actuarial indications, changes in claim handling practices or other changes that affect the timing of payment or development patterns, changes in the mix of business, the maturity of the accident year, pertinent trends observed over the recent past, the level of volatility within a particular line of business, the improvement or deterioration of actuarial indications in the current period as compared to prior periods, and the amount of reserves related to third party pools for which the Company has limited access to the underlying data and, accordingly, relies on calculations provided by such pools.
The assumptions used in the Black-Scholes pricing model for Tandem Awards granted during the years ended December 31, 2017, 2016 and 2015 are presented below.
The weighted-average grant-date fair values of Tandem Awards granted during 2017, 2016 and 2015 were $8.89, $5.17 and $7.85, respectively. Total intrinsic value of Tandem Awards exercised was $4.9 million, $2.0 million and $4.6 million for the years ended December 31, 2017, 2016 and 2015, respectively. Cash received from exercises of Tandem Awards was $4.0 million, $3.5 million and $3.9 million for the years ended December 31, 2017, 2016 and 2015, respectively. Total tax benefit realized for tax deductions from exercises of Tandem Awards was $1.7 million, $0.7 million and $1.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position, of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.