The Company’s net income increased by $341.0 million in 2019, compared to 2018, due primarily to higher Adjusted Consolidated Net Operating Income, higher investment results and lower acquisition related transaction, integration and other costs. Adjusted Consolidated Net Operating Income increased by $159.9 million in 2019, compared to 2018, due primarily to higher Specialty Property & Casualty Insurance and Preferred Property & Casualty Insurance segment net operating income, partially offset by a reduction in Corporate and Other Net Operating Income.
Net Investment Income decreased by $16.1 million in 2020 due primarily to lower yields on fixed income securities and higher investment expenses, partially offset by higher rate of return from Alternative Investments and higher levels of investments in fixed income securities. Net Investment Income from Alternative Investments related to Equity Method Limited Liability investments increased by $3.9 million. Net Investment Income from Alternative Investments related to limited liability investments included in either Equity Securities at Fair Value or Equity Securities at Modified Cost increased by $4.1 million.
Earned premiums in preferred personal automobile insurance increased by $30.0 million in 2019, compared to 2018, due primarily to higher average earned premiums. Incurred losses and LAE were $332.1 million, or 70.6% of earned premiums, in 2019, compared to $310.2 million, or 70.5% of earned premiums, in 2018. Incurred losses and LAE as a percentage of earned premiums increased due primarily to a deterioration in the underlying loss and LAE ratio, partially offset by a favorable change in loss and LAE reserve development. Underlying losses and LAE as a percentage of related earned premiums were 70.6% in 2019, compared to 70.2% in 2018, which was a deterioration of 0.4 percentage points due primarily to the impact of business mix in 2019. Catastrophe losses and LAE (excluding reserve development) were $7.8 million in 2019, compared to $7.2 million in 2018. Favorable loss and LAE reserve development was $8.2 million in 2019, compared to $5.8 million in 2018.
Earned premiums on life insurance increased by $1.1 million in 2020, compared to 2019, due primarily to higher persistency. Policyholders’ benefits and incurred losses and LAE on life insurance were $318.2 million in 2020, compared to $270.1 million in 2019, an increase of $48.1 million, due primarily to higher mortality for life insurance claims primarily due to COVID-19, and the impact of a lower reduction of the Company’s estimate of the ultimate cost of using death verification databases in 2020 compared to 2019. The Company reduced its estimate of the ultimate cost of using death verification databases in its operations by $9.3 million and $21.0 million, respectively during 2020 and 2019. Insurance expenses increased by $3.5 million in 2020, compared to 2019 due primarily to investments made to modernize and strengthen the distribution channel and enhance the capabilities of the business.
Selected financial information for the accident and health insurance product line is presented below.
Net Realized Gains on Sales of Equity Securities for the year ended December 31, 2020 primarily relate to transactions whereby the Company’s investments were acquired by other companies.
The Company’s effective income tax rate from continuing operations differs from the Federal statutory income tax rate due primarily to (1) the effects of tax-exempt investment income and dividends received deductions, (2) nontaxable income associated with the change in cash surrender value on COLI, (3) Alternative Energy investment tax credits, (4) a permanent difference between the amount of long-term equity-based compensation expense recognized under GAAP and the amount deductible in the computation of Federal taxable income, (5) a permanent difference associated with nondeductible executive compensation, and (6) the Tax Act.
Kemper’s subsidiaries, United Insurance, Trinity Universal Insurance Company (“Trinity”) and Alliance United Insurance Company (“Alliance”) are members of the FHLB of Chicago, Dallas and San Francisco, respectively. Alliance became a member of the FHLB of San Francisco in August 2020. United Insurance became a member of the FHLB of Chicago in March 2014. Trinity became a member of the FHLB of Dallas in December 2013. Under their memberships, United, Trinity and Alliance may borrow through the advance program of their respective FHLB. As a requirement of membership in the FHLB, United Insurance, Trinity and Alliance must maintain certain levels of investment in FHLB common stock and additional amounts based on the level of outstanding borrowings. The Company’s investments in FHLB common stock are reported at cost and included in Equity Securities at Modified Cost. The carrying value of FHLB of Chicago common stock was $11.8 million and $4.9 million at December 31, 2020 and December 31, 2019, respectively. The carrying value of FHLB of Dallas common stock was $3.4 million and $3.3 million at December 31, 2020 and December 31, 2019, respectively. The carrying value of FHLB of San Francisco common stock was $1.7 million at December 31, 2020. The Company periodically uses short-term FHLB borrowings for a combination of cash management and risk management purposes, in addition to long-term FHLB
and are able to invest a portion of their operating cash flows to fund future policyholder benefits and claims. During periods in which premium revenues decline, insurance companies may experience negative cash flows from operations and may need to sell investments to fund payments to policyholders and claimants. In addition, if the Company’s property and casualty insurance subsidiaries experience several significant catastrophic events over a relatively short period of time, investments may have to be sold in advance of their maturity dates to fund payments, which could result in either investment gains or losses. Management believes that its property and casualty insurance subsidiaries maintain adequate levels of liquidity in the event that they were to experience several future catastrophic events over a relatively short period of time.
Different assumptions are likely to result in different estimates of reported amounts. The Company’s critical accounting policies most sensitive to estimates include the valuation of investments, the valuation of reserves for property and casualty insurance incurred losses and LAE, the assessment of recoverability of goodwill and the valuation of pension benefit obligations.
Reserves for losses and LAE on property and casualty insurance coverage and health insurance coverage represent the estimated claim cost and loss adjustment expense necessary to cover the ultimate net cost of investigating and settling all losses incurred and unpaid at the end of any given accounting period. Such estimates are based on individual case estimates for reported claims and estimates for incurred but not reported (“IBNR”) losses, including expected development on reported
The carrying values of the Company’s Other Investments at December 31, 2020 and 2019 were:
Interest Expense, including facility fees, accretion of discount, amortization of premium and amortization of issuance costs, was $36.0 million, $42.5 million and $43.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. Interest paid, including facility fees, was $34.6 million, $44.0 million and $37.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Human Resources and the Compensation Committee of the Board of Directors, or the Board’s authorized designee, has sole discretion to determine the persons to whom awards under the 2020 Omnibus Plan are granted, and the material terms of the awards. For Tandem Awards, material terms include the number of shares covered by such awards and the exercise price, vesting and expiration dates of such awards. Tandem Awards are non-transferable. The exercise price of Tandem Awards is the fair value of Kemper’s common stock on the date of grant. Tandem Awards and RSU awards granted to employees generally vest in three equal annual installments over a period of three years, with the Tandem Awards expiring ten years from the date of grant. Employee PSU awards generally vest over a period of three years, subject to performance results and other restrictions.
•is below the “target” performance level, but at or above a “minimum” performance level, only a portion of the PSUs originally issued to the award recipient will vest; or
Commissions for servicing policies are expensed as incurred, rather than deferred and amortized. The Company recorded amortization of Deferred Policy Acquisition Costs of $641.8 million, $408.3 million and $377.1 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The measurement dates of the assets and liabilities at end of year in the preceding table under the headings “2020” and “2019” were December 31, 2020 and December 31, 2019, respectively.
The components of Comprehensive OPEB Expense (Income) for the years ended December 31, 2020, 2019 and 2018 were:
The Specialty Property & Casualty Insurance segment’s principal products are specialty automobile insurance and commercial automobile insurance. The Preferred Property & Casualty Insurance segment’s principal products are preferred automobile insurance, homeowners insurance, and other personal insurance. These products are distributed primarily through independent agents and brokers.The Life & Health Insurance segment’s principal products are individual life, accident, health and property insurance. These products are distributed by career agents employed by the Company and independent agents and brokers.
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 $109.5 million, $103.9 million and $68.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. The Company does not allocate Income (Loss) from Change in Fair Value of Equity and Convertible Securities, Net Realized Gains on Sales of Investments, Impairment Losses, Acquisition Related Transaction, Integration and Other Costs, Loss from Early Extinguishment of Debt, interest expense on debt or postretirement benefit plans, and actuarial gains and losses on its postretirement benefit plans to its operating segments. Additionally, the Company did not allocate the 2018 and 2017 impacts of the Tax Act or the gains recognized in 2019 and 2018 on the partial satisfaction of a final judgment against Computer Sciences Corporation (“CSC”) to its operating segments.
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 a catastrophe reinsurance program for the property and casualty insurance companies. In 2020, the property business written through the Life & Health segment was included in the catastrophe reinsurance program. Coverage for the catastrophe reinsurance program is provided in various layers through multiple excess of loss reinsurance contracts and an annual aggregate excess property catastrophe reinsurance contract.
Mr. Christopher B. Sarofim, a director of Kemper, is Vice Chairman and a member of the board of directors of Fayez Sarofim & Co. (“FS&C”), a registered investment advisory firm. The Company’s defined benefit pension plan had $64.7 million, $149.3 million and $124.5 million in assets managed by FS&C at December 31, 2020, 2019 and 2018, respectively, under an agreement with FS&C whereby FS&C provides investment management services with respect to certain funds of the plan. Investment Expenses incurred in connection with such agreement were $0.7 million, $0.9 million, and $0.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. The Company believes that the services described above have been provided on terms no less favorable to the Company than could have been negotiated with non-affiliated third parties.
We have audited the accompanying consolidated balance sheets of Kemper Corporation and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income (loss), shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Given the significant judgments made by management in estimating property and casualty insurance reserves, auditing property and casualty insurance reserves required a high degree of auditor judgment and an increased extent of effort, including the involvement of our actuarial specialists.
◦We compared our prior year estimates of expected incurred losses to actual experience during the most recent year to identify potential bias in the Company’s determination of property and casualty insurance reserves.
•We tested the effectiveness of controls related to fixed maturity securities, including those controls related to the determination of fair value.