The Company primarily 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 such regions, modifications of, and/or limitations to coverages and deductibles for certain perils in such regions and a primary catastrophe reinsurance program for the Property & Casualty Insurance segment. Coverage for this segment’s primary catastrophe reinsurance program is provided in various layers. The Property & Casualty Insurance segment also purchases reinsurance from the FHCF for hurricane losses in Florida at retentions lower than its primary catastrophe reinsurance program. The Life & Health Insurance segment also purchases reinsurance from the FHCF for hurricane losses in Florida. Except for the coverage provided by the FHCF, the Life & Health Insurance segment has not carried any other catastrophe reinsurance since 2012, primarily due to actions taken by KHSC to reduce its exposures to catastrophes.
Earned Premiums in the Property & Casualty Insurance segment increased by $165.7 million. Excluding the $272.9 million impact from Alliance United, earned premiums decreased by $107.2 million, as lower volume accounted for a decrease of $127.4 million, while higher average earned premium accounted for an increase of $20.2 million. Excluding Alliance United, the lower volume was driven primarily by preferred personal automobile insurance, homeowners insurance and nonstandard personal automobile insurance, which had volume decreases of $80.2 million, $32.0 million and $8.8 million, respectively. Excluding Alliance United, the increase in average earned premium was driven primarily by nonstandard personal automobile insurance, homeowners insurance and preferred personal automobile insurance, which had increases of $8.2 million, $5.9 million and $4.2 million, respectively.
Earned premiums in commercial automobile insurance decreased by $1.2 million in 2016, compared to 2015, as lower volume accounted for a decrease of $3.8 million, while higher average earned premium accounted for an increase of $2.6 million. Incurred losses and LAE were $47.2 million, or 88.6% of earned premiums, in 2016, compared to $47.7 million, or 87.5% of earned premiums, in 2015. Incurred losses and LAE as a percentage of earned premiums increased due primarily to a higher level of adverse loss and LAE reserve development and higher incurred catastrophe losses and LAE (excluding reserve development), partially offset by lower underlying losses and LAE as a percentage of earned premiums. Underlying losses and LAE as a percentage of earned premiums were 82.6% in 2016, compared to 83.8% in 2015, which was an improvement of 1.2 percentage points due primarily to higher average earned premium and lower severity of losses, partially offset by higher frequency of claims. Adverse loss and LAE reserve development was $2.4 million in 2016, compared to $1.8 million in 2015.
Selected financial information for the accident and health insurance product line follows.
The Company owns investments in various limited liability investment companies and limited partnerships that primarily invest in distressed debt, mezzanine debt and secondary transactions. The Company’s investments in these limited liability investment companies and limited partnerships are reported either as Equity Method Limited Liability Investments, Other Equity Interests and included in Equity Securities, or Fair Value Option Investments depending on the accounting method used to report the investment. See Note 2, “Summary of Accounting Policies and Accounting Changes,” to the Consolidated Financial Statements. Additional information pertaining to these investments at December 31, 2016 and 2015 is presented below.
In September 2014, the Company determined that it was no longer probable that certain software for the Property & Casualty Insurance segment would be completed and/or fully implemented. Accordingly, the Company recorded a charge of $54.6 million before taxes to write off such software in 2014.
Changes to claims practices, including, but not limited to, changes in the reporting and impact of large losses, timing of reported claims, changes in claims closing and re-opening patterns, adequacy of case reserves, implementation of new systems for handling claims, turnover of claims department staffs, timing and depth of the audit review of claims handling procedures;
In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The amendments in ASU 2015-02 affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities while also eliminating the presumption that a general partner should consolidate a limited partnership. ASU 2015-02 may also affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. The Company's adoption and initial application as of January 1, 2016 resulted in no changes to the legal entities that the Company consolidates.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that utilizes expected credit losses to provide for an allowance for credit losses for financial instruments and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement includes the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. Credit losses on available-for-sale debt securities are measured in a manner similar to current GAAP, although the ASU requires that they be presented as an allowance rather than as a write-down. In situations where the estimate of credit loss on an available-for-sale
Outstanding equity-based compensation awards at December 31, 2016 consisted of tandem stock option and stock appreciation rights (“Tandem Awards”), time-vested restricted stock, time-vested RSUs, performance-based RSUs and DSUs. Effective February 4, 2014, the Company began issuing time-based and performance-based RSUs. Recipients of restricted stock receive full dividend and voting rights on the same basis as all other outstanding shares of Kemper common stock. RSUs and DSUs give the recipient the right to receive one share of Kemper common stock for each RSU or DSU issued. Recipients of RSUs and DSUs receive full dividend equivalents on the same basis as all other outstanding shares of Kemper common stock, but do not receive voting rights until such shares are issued. Except as described below for equity-based compensation awards granted to each member of the Board of Directors who is not employed by the Company (“Non-employee Directors”), all outstanding awards are subject to forfeiture until certain restrictions have lapsed.
is below the “target” performance level, but at or above a “minimum” performance level, only a portion of the shares of performance-based restricted stock or RSUs originally issued to the award recipient will vest; or
is below a “minimum” performance level, none of the shares of performance-based restricted stock or RSUs originally issued to the award recipient will vest.
Performance-based awards outstanding on January 1, 2016 are measured using a market performance condition. Fair value for these awards was estimated using the Monte Carlo simulation method described above. For awards outstanding on January 1, 2016, the final payout of these awards, and any forfeitures of shares for performance below the “target” performance level, are determined based on Kemper’s total shareholder return, relative to a peer group comprised of all the companies in the S&P Supercomposite Insurance Index, over the respective three-year performance period ending on either December 31, 2017, 2016 or 2015, depending on the three-year performance period being measured. Compensation cost for these awards is recognized ratably over the requisite service period. In the event that the market performance condition is not satisfied, previously recognized compensation cost would not reverse, but it would reverse if the requisite service period is not met.
Net Investment Income for the years ended December 31, 2016, 2015 and 2014 was:
Comprehensive Income Tax Benefit (Expense) included in the Consolidated Financial Statements for the years ended December 31, 2016, 2015 and 2014 was:
Summary financial information included in Income from Discontinued Operations for the years ended December 31, 2016, 2015 and 2014 is presented below.