The Company’s net income increased by $69.2 million in 2018, compared to 2017. In the Preferred Property & Casualty Insurance segment, segment net operating results increased by $71.1 million due primarily to lower catastrophe losses and LAE (excluding reserve development) and the favorable impact of loss and LAE reserve development, partially offset by higher insurance expenses as a percentage of earned premiums. See MD&A, “Preferred Property & Casualty Insurance,” beginning on page 33 for additional discussion of the segment’s results. In the Specialty Property & Casualty Insurance segment, segment net operating results increased by $59.5 million due primarily to the impact of lower underlying losses and LAE as a percentage of earned premiums on a higher level of earned premiums, higher net investment income and lower levels of adverse loss and LAE reserve development, partially offset by the impact of higher insurance expenses as a percentage of earned premiums on a higher level of earned premiums and driven by the amortization of purchase accounting adjustments associated with Kemper’s acquisition of Infinity. See MD&A, “Specialty Property & Casualty Insurance,” beginning on page 40 for additional discussion
The Company’s net income increased by $104.1 million in 2017, compared to 2016. In the Preferred Property & Casualty Insurance segment, segment net operating results deteriorated by $61.0 million due primarily to higher incurred catastrophe losses and LAE (excluding reserve development) and an unfavorable change in loss and LAE reserve development, partially offset by higher net investment income. See MD&A, “Preferred Property & Casualty Insurance,” beginning on page 33 for additional discussion of the segment’s results. In the Specialty Property & Casualty Insurance segment, segment net operating results increased by $70.8 million due primarily to lower underlying losses and LAE as a percentage of earned premiums, lower insurance expenses as a percentage of earned premiums and higher net investment income. See MD&A, “Specialty Property & Casualty Insurance,” beginning on page 40 for additional discussion of the segment’s results. In the Life & Health Insurance segment, segment net operating income increased by $60.9 million due primarily to a $50.5 million after-tax charge in 2016 to recognize the impact of using death verification databases in the Company’s operations, including to determine its IBNR liability for unpaid claims and claims adjustment expenses for life insurance products. See MD&A, “Life & Health Insurance,” beginning on page 45 for additional discussion of the segment’s results. The Company’s results were also positively impacted in 2017, compared to 2016, by higher net realized gains on sales of investments, lower impairment losses recognized in earnings and a lower unallocated net operating loss, due primarily to an income tax benefit of $7.4 million to recognize the effects of changes in the federal income tax law. See MD&A, “Investment Results,” beginning on page 50 and MD&A, “Income Taxes,” beginning on page 57 for additional information.
See MD&A, “Preferred Property & Casualty Insurance,” MD&A, “Specialty Property & Casualty Insurance,” MD&A, “Life & Health Insurance,” and Note 6, “Property and Casualty Insurance Reserves,” to the Consolidated Financial Statements for additional information on the Company’s reserve development. See MD&A, “Critical Accounting Estimates,” of this 2018 Annual Report for additional information pertaining to the Company’s process of estimating property and casualty insurance reserves for losses and LAE, and the estimated variability thereof, development of property and casualty insurance losses and LAE, and a discussion of some of the variables that may impact them.
Underlying losses and LAE as a percentage of earned premiums were 74.9% in 2018, a decrease of 3.8 percentage points, compared to 2017, driven by both specialty personal automobile insurance and commercial automobile insurance product lines, particularly in the Infinity business which historically had lower underlying losses and LAE as a percentage of earned premiums. Underlying losses and LAE exclude the impact of catastrophes and loss and LAE reserve development. Catastrophe losses and LAE (excluding reserve development) were $4.7 million in 2018, compared to $5.5 million in 2017, which is a decrease of $0.8 million. Adverse loss and LAE reserve development (including catastrophe reserve development) was $1.7 million in 2018, compared to $3.8 million in 2017.
See Note 2, “Summary of Accounting Policies and Accounting Changes,” to the Consolidated Financial Statements under the sub-caption “Insurance Reserves” for additional discussion.
Net Investment Income increased by $13.7 million for the year ended December 31, 2018, compared to 2017, due primarily to higher levels of investments in fixed income securities, partially offset by lower returns from Alternative Investments and lower yields on fixed income securities.
Loss From Change in Fair Value of Equity and Convertible Securities
Other sales activity in 2018, 2017 and 2016 was due to normal portfolio management.
The following table summarizes the fair value of the Company’s investments in non-governmental fixed maturities by range of amount invested at December 31, 2018.
The Company has $450.0 million of 4.35% senior notes due February 15, 2025 (the “2025 Senior Notes”) outstanding as of December 31, 2018. The Company initially issued $250.0 million of the 2025 Senior Notes in February of 2015. In June of 2017, Kemper issued an additional $200 million of the 2025 Senior Notes. The proceeds of the additional issuance were $200.2 million, net of discount and transaction costs, for an effective yield of 4.16%. The additional notes are fungible with the initial notes issued in 2015, and together are treated as part of a single series for all purposes under the indenture governing the 2025 Senior Notes. Kemper used the net proceeds from the additional issuance for general corporate purposes. The 2025 Senior Notes are unsecured and may be redeemed in whole at any time or in part from time to time at Kemper’s option at specified redemption prices.
Equity investments include common stocks, non-redeemable preferred stocks, exchange traded funds, money market mutual funds and limited liability companies and investment partnerships in which the Company’s interests are deemed minor. Equity investments with readily determinable fair values are recorded as Equity Securities at Fair Value on the Consolidated Balance Sheets. Effective January 1, 2018, changes in the fair value of such equity securities are reported in the Consolidated Statements of Income. Prior to January 1, 2018, changes in the fair values of such equity securities were reported in AOCI. Dividend income on investments in common and non-redeemable preferred stocks is recognized on the ex-dividend date. The Company holds certain equity investments without readily determinable fair values at cost, less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer on the Consolidated Balance Sheet as Equity Securities at Modified Cost. Changes in the carrying value of Modified Cost investments due to observable price changes are recorded as Income (Loss) from Change in Fair Value of Equity and Convertible Securities.
Other Assets primarily include property and equipment, internal use software, insurance licenses acquired in business combinations, the value of other intangible assets acquired, corporate-owned life insurance and prepaid expenses. Property and equipment is depreciated over the useful lives of the assets, generally using the straight-line or double declining balance methods of depreciation depending on the asset involved. Internal use software is amortized over the useful life of the asset using the straight-line method of amortization and is evaluated for recoverability upon identification of impairment indicators. Insurance licenses acquired in business combinations and other indefinite life intangibles are not amortized, but rather tested periodically for recoverability.
senior debt. By the nature of their underlying investments, the Company believes that some of its investments in the limited liability companies and limited partnerships exhibit debt-like characteristics which, among other factors, the Company also considers when evaluating these investments for impairment. Based on evaluations of the factors in the preceding paragraph, the Company concluded that the declines in the fair values of the Company’s investments in equity securities presented in the preceding table were temporary at December 31, 2017.
Goodwill balances by business segment at December 31, 2018 and 2017 were:
On December 22, 2017, Public Law 115-97, more commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), was enacted. The Tax Act includes numerous changes to existing federal income tax law, including a permanent reduction in the federal corporate income tax rate from 35% to 21%, effective January 1, 2018. In 2017, pursuant to Staff Accounting Bulletin No. 118 (“SAB 118”), the Company recorded certain provisional amounts for estimated income tax effects of the Tax Act on deferred income taxes.
The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense. The liability for Unrecognized Tax Benefits included accrued interest of $0.7 million, $0.5 million and $0.5 million at December 31, 2018, 2017 and 2016, respectively. Net interest related to unrecognized tax benefits for the years ended December 31, 2018, 2017, and 2016 were insignificant.
In the event that the incurred catastrophe losses and LAE covered by the 2018 aggregate property catastrophe reinsurance contract exceeds the covered amount, the contract provides for one reinstatement of such coverage. In such an instance, the Company is required to pay a reinstatement premium to the reinsurers to reinstate the full amount of reinsurance available.
Catastrophe losses and LAE (including reserve development), net of reinsurance recoveries, for the years ended December 31, 2018, 2017 and 2016 by business segment are presented below.