Selected financial information as of and for the years ended December 31, 2020, 2019, 2018, 2017 and 2016 is presented below. See Note 2, “Summary of Accounting Policies and Accounting Changes”, and Note 3, “Acquisition of Business,” to the Consolidated Financial Statements for items which may affect comparability of selected financial information across the periods presented.
Beginning in March 2020, the global pandemic associated with COVID-19 and related economic conditions began to impact the Company's results of operations. The Company incurred additional expenses associated with COVID-19 and related economic conditions. The Company’s investment results were also negatively impacted by the recent disruption in global financial markets. For further discussion regarding the potential impacts of COVID-19 and related economic conditions on the Company, see “Caution Regarding Forward-Looking Statements” beginning on page 1 and Item 1A., Risk Factors, of Part I of this Annual Report on Form 10-K.
As part of the Company’s response to the COVID-19 pandemic, the Company recognized approximately $100 million of premium credits as a reduction to earned premiums in the second quarter of 2020. See MD&A, “Specialty Property & Casualty Insurance” and “Preferred Property & Casualty Insurance”, for additional information. The credits were applied directly to the policyholder's account statement. If a policyholder had paid in full, the policyholder received a refund of the credited amounts.
A reconciliation of Net Income to Adjusted Consolidated Net Operating Income (a non-GAAP financial measure) for the years ended December 31, 2020, 2019 and 2018 is presented below.
In the Specialty Property & Casualty Insurance segment, segment net operating income increased by $54.8 million due primarily to an improvement in underlying losses and LAE as a percentage of earned premiums and higher investment income, partially offset by the impact of adverse loss reserve development. Underlying losses and LAE exclude the impact of catastrophes and loss and LAE reserve development. See MD&A, “Specialty Property & Casualty Insurance,” beginning on page 35 for additional discussion of the segment’s results.
In the Life & Health Insurance segment, segment net operating income decreased by $38.7 million due primarily to higher mortality for life insurance claims due primarily to COVID-19. See MD&A, “Life & Health Insurance,” beginning on page 46 for additional discussion of the segment’s results.
Net Investment Income increased by $23.4 million in 2019 due primarily to higher levels of investments, largely due to the inclusion of the Infinity portfolio beginning in July 2018, partially offset by a lower rate of return from Alternative Investments. Net Investment Income from Alternative Investments, which consist of Equity Method Limited Liability Investments, and other limited liability investments included in Equity Securities at Fair Value or Equity Securities at Modified Cost, increased by $18.4 million. Alternative investment income from Equity Method Limited Liability Investments decreased by $10.0 million. Alternative investment income from limited liability investments included in either Equity Securities at Fair Value or Equity Securities at Modified Cost decreased by $8.4 million for the year ended December 31, 2019, compared to the same period in 2018. See MD&A, “Investment Results,” under the sub-caption “Net Investment Income” beginning on page 50 for additional discussion.
Other Income decreased by $6.7 million for the year ended December 31, 2019, compared to the same period in 2018. Other Income for the year ended December 31, 2019 includes a gain of $20.1 million, compared to a gain of $35.7 million for the same period in 2018 related to the partial satisfaction of a final judgment against CSC. See Note 23, “Contingencies.” to the Consolidated Financial Statements for additional discussion. In July 2019, the Company entered into a marketing agreement with Hagerty to transfer the Company’s Classic Collectors book of business to Hagerty. Other Income for the year ended December 31, 2019 includes a gain of $3.8 million related to this agreement. Other Income for the year ended December 31, 2019 includes income of $7.8 million, compared to income of $3.6 million for the same period in 2018 from the Company’s corporate-owned life insurance (“COLI”) policies. Other Income from COLI increased due in part to the purchase of additional life insurance in the second and fourth quarters of 2019.
Net Realized Gains on Sales of Investments were $41.9 million in 2019, compared to $26.4 million in 2018. See MD&A, “Investment Results,” under the sub-caption “Net Realized Gains on Sales of Investments” beginning on page 51 for additional discussion. Impairment Losses in 2019 and 2018 were $13.8 million and $4.5 million, respectively. See MD&A, “Investment Results,” under the sub-caption “Impairment Losses” beginning on page 52 for additional discussion. The Company cannot predict when or if similar investment gains or losses may occur in the future.
In 2018, the Company had reinsurance recoveries of $31.8 million under its catastrophe reinsurance programs primarily driven by the 2017 and 2018 California wildfires. In 2019, the Company entered into a sale of subrogation rights resulting in a reduction of the reinsurance recoveries of $15.5 million. In 2020, the reinsurance recoveries were further reduced by $1.5 million. Catastrophe recoveries under the FHCF were not material in 2020, 2019, or 2018. In 2020, 2019 and 2018 the Company paid $0.0 million, $0.0 million and $0.4 million in reinstatement premium, respectively. See the “Reinsurance” subsection of the “Property and Casualty Insurance Business” and “Life and Health Insurance Business” sections of Item 1(c), “Description of Business,” and Note 20, “Catastrophe Reinsurance,” to the Consolidated Financial Statements for additional information on the Company’s reinsurance programs.
Increases (decreases) in the Company’s property and casualty loss and LAE reserves for the years ended December 31, 2020, 2019 and 2018 to recognize adverse (favorable) loss and LAE reserve development from prior accident years in continuing operations, hereinafter also referred to as “reserve development” in the discussion of segment results, are presented below.
See MD&A, “Specialty Property & Casualty Insurance,” MD&A, “Preferred 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 2020 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 Combined Ratio is computed by adding the Current Year Non-catastrophe Losses and LAE Ratio with the Insurance Expense Ratio. The most directly comparable GAAP financial measure is the Combined Ratio, which is computed by adding Total Incurred Losses and LAE Ratio, including the impact of catastrophe losses and loss and LAE reserve development from prior years, with the Insurance Expense Ratio.
The Company believes Underlying Losses and LAE and the Underlying Combined Ratio are useful to investors and uses these financial measures to reveal the trends in the Company’s Property & Casualty Insurance segment that may be obscured by catastrophe losses and prior-year reserve development. These catastrophe losses may cause the Company’s loss trends to vary significantly between periods as a result of their incidence of occurrence and magnitude and can have a significant impact on incurred losses and LAE and the Combined Ratio. Prior-year reserve developments are caused by unexpected loss development on historical reserves. Because reserve development relates to the re-estimation of losses from earlier periods, it has no bearing on the performance of the Company’s insurance products in the current period. The Company believes it is useful for investors to evaluate these components separately and in the aggregate when reviewing the Company’s underwriting performance.
Adjusted Consolidated Net Operating Income is an after-tax, non-GAAP financial measure and is computed by excluding from Income from Continuing Operations the after-tax impact of:
(i) Income (Loss) from Change in Fair Value of Equity and Convertible Securities;
(vi) Significant non-recurring or infrequent items that may not be indicative of ongoing operations
The Company believes that Adjusted Consolidated Net Operating Income provides investors with a valuable measure of its ongoing performance because it reveals underlying operational performance trends that otherwise might be less apparent if the items were not excluded. Income (Loss) from Change in Fair Value of Equity and Convertible Securities, Net Realized Gains on Sales of Investments and Impairment Losses related to investments included in the Company’s results may vary significantly between periods and are generally driven by business decisions and external economic developments such as capital market conditions that impact the values of the Company’s investments, the timing of which is unrelated to the insurance underwriting process. Acquisition Related Transaction and Integration Costs may vary significantly between periods and are generally driven by the timing of acquisitions and business decisions which are unrelated to the insurance underwriting process. Debt Extinguishment, Pension and Other Charges relate to (i) loss from early extinguishment of debt, which is driven by the Company’s financing and refinancing decisions and capital needs, as well as external economic developments such as debt market conditions, the timing of which is unrelated to the insurance underwriting process; (ii) settlement of pension plan obligations which are business decisions are made by the Company, the timing of which is unrelated to the underwriting process; and (iii) other charges that are non-standard, not part of the ordinary course of business, and unrelated to the insurance underwriting process. Significant non-recurring items are excluded because, by their nature, they are not indicative of the Company’s business or economic trends.
The preceding non-GAAP financial measures should not be considered a substitute for the comparable GAAP financial measures, as they do not fully recognize the overall profitability of the Company’s businesses.
Selected financial information for the Specialty Property & Casualty Insurance segment is presented below.
Earned Premiums in the Specialty Property & Casualty Insurance segment increased by $256.9 million in 2020, compared to 2019, driven primarily by higher volume, partially offset by the impact of premium credits of $87.1 million issued to policyholders during the second quarter of 2020. Both of the segment’s product lines had higher volume, although the overall impact on earned premiums was driven primarily by specialty personal automobile insurance.
Net Investment Income in the Specialty Property & Casualty Insurance segment increased by $6.6 million in 2020, compared to 2019, due primarily to a higher return on Alternative Investments and higher levels of fixed income securities, partially offset by lower yields on fixed income securities.
Underlying losses and LAE as a percentage of earned premiums were 70.4% in 2020, an improvement of 4.3 percentage points, compared to 2019, due primarily to improvements in claim frequency. Underlying losses and LAE exclude the impact of catastrophes and loss and LAE reserve development. Catastrophe losses and LAE (excluding reserve development) were $12.3 million in 2020, compared to $11.1 million in 2019, an increase of $1.2 million. Unfavorable loss and LAE reserve development (including catastrophe reserve development) was $15.3 million in 2020, compared to favorable development of $34.6 million in 2019.
The Specialty 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.
The Specialty Property & Casualty Insurance segment reported Segment Net Operating Income of $283.1 million for the year ended December 31, 2019, compared to $115.8 million in 2018. Segment net operating results improved by $167.3 million due primarily to the acquisition of Infinity in 2018 and favorable loss and LAE reserve development.
Net Investment Income in the Specialty Property & Casualty Insurance segment increased by $44.1 million in 2019, compared to 2018, due primarily to a higher investment base, largely due to the inclusion of the Infinity investment portfolio for the entire year in 2019 versus only a six month period in 2018, partially offset by lower rate of return on alternative investments.
Insurance expenses were $555.6 million, or 18.0% of earned premiums, in 2019, an improvement of 2.8% percentage points, compared to 2018, due primarily to lower amortization of Infinity purchase accounting adjustments in 2019, versus 2018.
Earned Premiums on specialty personal automobile insurance increased by $205.7 million in 2020, compared to 2019, due primarily to higher volume, partially offset by premium credits of $83.5 million issued to policyholders during the second quarter of 2020. Incurred losses and LAE were $2,200.7 million, or 72.6% of earned premiums, in 2020, compared to $2,117.6 million, or 74.9% of earned premiums, in 2019. Incurred losses and LAE as a percentage of earned premiums improved primarily due to an improvement in underlying losses and LAE as a percentage of earned premiums, partially offset by adverse loss reserve development. Underlying losses and LAE as a percentage of related earned premiums were 71.3% in 2020, compared to 75.4% in 2019, an improvement of 4.1 percentage points due primarily to improvements in claim frequency. Catastrophe losses and LAE (excluding reserve development) were $11.6 million in 2020, compared to $9.9 million in 2019. Unfavorable loss and LAE reserve development was $28.2 million in 2020, compared to favorable development of $23.8 million in 2019.
Selected financial information for the Preferred Property & Casualty Insurance segment is presented below.
The Preferred Property & Casualty Insurance segment reported Segment Net Operating Income of $3.5 million for the year ended December 31, 2020, compared to $41.9 million in 2019. Segment Net Operating Income decreased by $38.4 million due primarily to higher catastrophe losses and LAE (excluding loss reserve development), the impact of adverse loss and LAE reserve development and lower net investment income, partially offset by an improvement in underlying losses and LAE as a percentage of earned premiums.
Underlying losses and LAE as a percentage of earned premiums were 58.3% and 64.2% in 2020 and 2019, respectively. Catastrophe losses and LAE (excluding reserve development) were $82.0 million in 2020, compared to $63.0 million in 2019, which is a increase of $19.0 million. Catastrophe losses and LAE (excluding reserve development) increased due primarily to an increase in both frequency and severity of catastrophic events in 2020, compared to 2019. There were five catastrophic events above $5 million in 2020, compared to four catastrophic events above $5 million in 2019. Adverse loss and LAE reserve development (including catastrophe reserve development) was $20.2 million in 2020, compared to favorable development of $36.0 million in 2019. Favorable catastrophe reserve development in 2019 included the impact of the recognition and sale in the third quarter of 2019 of the Company’s subrogation rights related to certain California wildfires that had occurred in 2017 and 2018.
Insurance expenses were $221.1 million, or 32.1% of earned premiums, in 2020, a deterioration of 1.0 percentage points compared to 2019. Excluding the impact of premium credits, insurance expenses were 31.5% of earned premiums.
Net Investment Income in the Preferred Property & Casualty Insurance segment decreased by $17.7 million in 2019, compared to 2018, due primarily to a lower rate of return on alternative investments.
Earned premiums on preferred personal automobile insurance decreased by $38.5 million in 2020, compared to 2019, due primarily to lower volume and the impact of premium credits of $12.7 million issued to policyholders during the second quarter of 2020. Incurred losses and LAE were $311.0 million, or 72.0% of earned premiums, in 2020, compared to $332.1 million, or 70.6% of earned premiums, in 2019. Incurred losses and LAE as a percentage of earned premiums increased due primarily to adverse loss and LAE reserve development. Underlying losses and LAE as a percentage of earned premiums were 64.8% in 2020, compared to 70.6% in 2019, which was an improvement of 5.8 percentage points due primarily to improvements in claim frequency in 2020. Adverse loss and LAE reserve development (including catastrophe loss reserve development) was $26.7 million in 2020, compared to favorable development of $8.2 million in 2019. Catastrophe losses and LAE (excluding reserve development) were $4.4 million in 2020, compared to $7.8 million in 2019.
Earned premiums in homeowners insurance decreased by $20.6 million in 2020, compared to 2019, due primarily to lower volume. Incurred losses and LAE were $177.8 million, or 80.6% of earned premiums, in 2020, compared to $165.9 million, or 68.8% of earned premiums, in 2019. Incurred losses and LAE as a percentage of earned premiums increased due primarily to higher incurred catastrophe losses and LAE (excluding loss reserve development) and lower favorable catastrophe loss 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 49.3% in 2020, compared to 54.5% in 2019, a improvement of 5.2 percentage points. Catastrophe losses and LAE (excluding reserve development) were $71.2 million in 2020, compared to $54.0 million in 2019. Favorable loss and LAE reserve development (including catastrophe loss reserve development) was $2.1 million in 2020, compared to favorable development of $19.7 million in 2019. Favorable catastrophe reserve development in 2019 included the impact of the recognition and sale of the Company’s subrogation rights related to certain California wildfires that had occurred in 2017 and 2018.
Earned premiums in homeowners insurance decreased by $8.8 million in 2019, compared to 2018, due primarily to lower volume. Incurred losses and LAE were $165.9 million, or 68.8% of earned premiums, in 2019, compared to $209.9 million, or 83.9% of earned premiums, in 2018. Incurred losses and LAE as a percentage of earned premiums increased due primarily to lower incurred catastrophe losses and LAE (excluding loss and LAE reserve development) and higher favorable loss and LAE reserve development, partially offset by higher underlying losses and LAE as a percentage of earned premiums. Underlying losses and LAE as a percentage of earned premiums were 54.5% in 2019, compared to 52.5% in 2018, a deterioration of 2.0 percentage points due primarily to higher severity of non-catastrophe large losses in 2019 compared to 2018. Catastrophe losses and LAE (excluding reserve development) were $54.0 million in 2019, compared to $75.2 million in 2018. Favorable loss and LAE reserve development was $19.7 million in 2019, compared to adverse development of $3.2 million in 2018. Favorable loss and LAE reserve development in 2019 included the impact of the recognition and sale of the Company’s subrogation rights related to certain California wildfires that had occurred in 2017 and 2018.
Earned premiums in other personal insurance decreased by $3.0 million in 2020, compared to 2019. Incurred losses and LAE were $14.3 million, or 39.9% of earned premiums, in 2020, compared to $10.8 million, or 27.8% of earned premiums, in 2019. Underlying losses and LAE as a percentage of earned premiums were 34.3% in 2020, compared to 45.6% in 2019, an improvement of 11.3 percentage points. Catastrophe losses and LAE (excluding reserve development) were $6.4 million in 2020, compared to $1.2 million in 2019. Favorable loss and LAE reserve development (including catastrophe loss reserve development) was $4.4 million in 2020, compared to $8.1 million in 2019.
Net Investment Income decreased by $7.6 million in 2020, compared to 2019, due primarily to lower yields on fixed income securities, partially offset by higher levels of investments in fixed income securities and a change in the Company’s presentation of COLI income.
Other income decreased by $7.9 million in 2020, compared to 2019, due primarily to the change in presentation of COLI income.
Policyholders’ Benefits and Incurred Losses and LAE increased by $39.3 million in 2020, compared to 2019, due primarily to higher mortality for life insurance claims due primarily 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, partially offset by lower frequency of accident and health insurance claims due to COVID-19. 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.
Earned Premiums in the Life & Health Insurance segment increased by $17.4 millions for the year ended December 31, 2019, compared to 2018, due primarily to higher volume from accident and health insurance products offered by Reserve National, and sales volume on life insurance products.
Policyholders’ Benefits and Incurred Losses and LAE decreased by $1.5 million in 2019, compared to 2018, due primarily to decrease of $21.0 million in the company’s estimate of the ultimate cost of using death verification databases in the Company’s operations, partially offset by higher severity on accident and health insurance claims.
Insurance Expenses in the Life & Health Insurance segment increased by $12.9 million due primarily to higher commissions on increased volume within the business and investments to enhance the capabilities of the business.
Segment Net Operating Income in the Life & Health Insurance segment was $98.7 million for the year ended December 31, 2019, compared to $91.5 million in 2018.
Earned premiums on life insurance increased by $6.2 million in 2019, compared to 2018, due primarily to a higher volume of new business sales. Policyholders’ benefits and incurred losses and LAE on life insurance were $270.1 million in 2019, compared to $279.4 million in 2018, a decrease of $9.3 million due primarily to adjustment of the company’s estimate of the ultimate cost of using death verification databases in the company’s operations. Insurance expenses increased by $7.6 million in 2019, compared to 2018 due primarily to higher commissions on increased volume and investments to enhance the capabilities of the business.
Earned premiums on accident and health insurance increased by $8.4 million in 2020, compared to 2019, due primarily to higher volume on accident and health insurance products and a reduction in the estimated return premium reserve for certain insurance products subject to MLR. Incurred accident and health insurance losses were $95.3 million, or 47.8% of accident and health insurance earned premiums, in 2020, compared to $109.8 million, or 57.5% of accident and health insurance earned premiums, in 2019. The decrease of 9.7 percentage points was due primarily to lower frequency of claims due to COVID-19. Insurance expenses increased by $3.2 million in 2020, compared to 2019, due primarily to premium growth and investments to enhance the capabilities of the business.
Earned premiums on accident and health insurance increased by $13.4 million in 2019, compared to 2018, due primarily to higher volume of in force business. Policyholders’ benefits and incurred losses and LAE on accident and health insurance were $109.8 million, or 57.5% of accident and health insurance earned premiums, in 2019, compared to $98.9 million, or 55.7% of accident and health insurance earned premiums, in 2018. The increase of 1.8% percentage points was due primarily to higher severity of claims for certain health products. Insurance expenses increased by $6.5 million in 2019, compared to 2018, due primarily to premium growth.
Net Investment Income for the years ended December 31, 2020, 2019 and 2018 is presented below.
The components of Total Comprehensive Investment Gains (Losses) for the years ended December 31, 2020, 2019 and 2018 are presented below.
The components of Income (Loss) from Change in Fair Value of Equity and Convertible Securities for the years ended December 31, 2020 and 2019 are presented below.
Net Realized Gains on Sales of Equity Securities for the year ended December 31, 2019 primarily relate to transactions whereby the Company’s investments were acquired by other companies.
Other sales activity in 2020, 2019 and 2018 was due to normal portfolio management.
The Company regularly reviews its investment portfolio for factors that may indicate that a decline in the fair value of an investment has occurred from credit loss or other factors (non-credit related). Losses arising from declines in fair values are reported in the Consolidated Statements of Income in the period that the declines are evaluated. The components of Impairment Losses in the Consolidated Statements of Income for the year ended December 31, 2020, 2019 and 2018 were:
Impairment Losses recognized in the Consolidated Statements of Income for the year ended December 31, 2020 or 2019 or 2018 related primarily to investments in Fixed Maturities where the Company had the intent to sell or requirement to sell.
The Company did not recognize any impairment losses related to Investments in Real Estate in the Consolidated Statements of Income for the year ended December 31, 2020 or 2019 or 2018.
The following table summarizes the credit quality of the Company’s fixed maturity investment portfolio at December 31, 2020 and 2019.
The following table summarizes the fair value of the Company’s investments in non-governmental fixed maturities by industry at December 31, 2020 and 2019.
The Company owns investments in various limited liability investment companies and limited partnerships that primarily invest in mezzanine debt, distressed debt, real estate and senior debt. Beginning January 1, 2018, the Company’s investments in these limited liability investment companies and limited partnerships are reported either as Equity Method Limited Liability Investments at Cost Plus Cumulative Undistributed Earnings, Other Equity Interests and included in Equity Securities at Fair Value, or Equity Securities at Modified Cost depending on the accounting method used to report the investment. Additional information pertaining to these investments at December 31, 2020 and 2019 is presented below.
Insurance Expenses increased by $80.8 million for the year ended December 31, 2020, compared to 2019, due primarily to growth in business. Insurance Expenses increased by $119.2 million for the year ended December 31, 2019, compared to 2018, due primarily to the inclusion of Infinity for the full twelve months in 2019 as compared to only six months in 2018, partially offset by a reduction in the amortization of VOBA.
On June 7, 2019, Kemper issued a notice of redemption for the entire $150.0 million aggregate principal outstanding of its 7.375% Subordinated Debentures due 2054 (the “7.375% Subordinated Debentures”) at a redemption price equal to 100% of their principal, plus accrued and unpaid interest on the redemption date. On July 8, 2019, Kemper completed the redemption, and the 7.375% Subordinated Debentures were repaid in full. The Company recognized a loss on early extinguishment of debt of $5.8 million in the Consolidated Statements of Income for the year ended December 31, 2019
Interest expense decreased by $6.5 million for the year ended December 31, 2020, compared to 2019, due primarily to the early extinguishment of the subordinated debenture in June 2019. Interest expense decreased by $0.9 million for the year ended December 31, 2019, compared to 2018, due primarily to lower levels of debt outstanding. See MD&A, “Liquidity and Capital Resources,” and Note 8, “Debt,” to the Consolidated Financial Statements for additional discussion of debt activity.
On June 7, 2019, the Company completed a public offering of its common stock and issued 1,552,500 shares of common stock, at $83.00 per share. Gross proceeds from the offering were $128.9 million. Transaction costs, including the underwriting discount, were $1.7 million. In July 2019, the Company used the net proceeds of $127.2 million, together with a portion of the proceeds from delayed-draw term loan facility entered into by the Company on June 4, 2019 (the “2023 Term Loan”) to redeem all $150.0 million in aggregate outstanding principal of its 7.375% Subordinated Debentures due 2054.
On June 8, 2018, the Company entered into an amended and extended credit agreement and term loan facility. The amended and extended credit agreement increased the borrowing capacity of the existing unsecured credit agreement to $300.0 million and extended the maturity date to June 8, 2023. The term loan facility included a delayed draw feature with borrowing capacity of $250.0 million and a maturity date two years from the borrowing date (see discussion below under the heading, “Repayment of Term Loan Due 2020,”for additional information regarding the initial borrowing and subsequent repayment of this delayed-draw term loan). On June 4, 2019, the Company utilized the the accordion feature under the credit agreement to increase its credit borrowing capacity by $100.0 million, resulting in the available credit commitments increasing from $300.0 million to $400.0 million. The Company incurred $0.1 million in additional debt issuance costs in connection with the utilization of the accordion feature, which in addition to the $0.9 million of remaining unamortized costs under the credit agreement, will be amortized under the remaining term of the credit agreement. There were no outstanding borrowings under the credit agreement at either December 31, 2020 or December 31, 2019.
On June 4, 2019, the Company entered into the 2023 Term Loan with a borrowing capacity of $50.0 million and a maturity date four years from the borrowing date. On July 5, 2019, the Company borrowed $49.9 million, net of debt issuance costs, under the 2023 Term Loan, with a final maturity date of July 5, 2023. The agreement includes a mutual option to extend the maturity date by one year.
On September 22, 2020, Kemper offered and sold $400.0 million aggregate principal of 2.400% senior notes due September 30, 2030 (“2030 Senior Notes”). The net proceeds of issuance were $395.6 million, net of discount and transaction costs for an effective yield of 2.52%. The 2030 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. Kemper is using the net proceeds from the issuance for general corporate purposes.
On June 7, 2019, Kemper issued a notice of redemption for the entire $150.0 million aggregate principal outstanding of its 7.375% Subordinated Debentures due 2054 (the “7.375% Subordinated Debentures”) at a redemption price equal to 100% of their principal, plus accrued and unpaid interest on the redemption date. On July 8, 2019, Kemper completed the redemption, and the 7.375% Subordinated Debentures were repaid in full. The Company recognized a loss on early extinguishment of debt of $5.8 million in the Consolidated Statement of Income for the year ended December 31, 2019.
The Company used the proceeds received from Kemper’s common stock offering on June 7, 2019, as well as a portion of the proceeds from its July 5, 2019 borrowing under the 2023 Term Loan, to repay the 7.375% Subordinated Debentures. See Note 8, “Debt,” and Note 10, “Shareholders’ Equity,” to the Consolidated Financial Statements for additional information.
Various state insurance laws restrict the ability of Kemper’s insurance subsidiaries to pay dividends without regulatory approval. Such insurance laws generally restrict the amount of dividends paid in an annual period to the greater of statutory net income from the previous year or 10% of statutory capital and surplus. Kemper’s direct insurance subsidiaries collectively paid $322.0 million, $239.0 million and $130.4 million in dividends to Kemper in 2020, 2019 and 2018, respectively. In 2021, Kemper estimates that its direct insurance subsidiaries would be able to pay approximately $402.8 million in dividends to Kemper without prior regulatory approval.
Kemper made capital contributions to insurance subsidiaries of $62 million and $83 million during 2020 and 2019, respectively.
Net Cash Provided by Operating Activities decreased by $86.3 million for the year ended December 31, 2020, compared to 2019. Net Cash Provided by Operating Activities decreased by $4.9 million for the year ended December 31, 2019, compared to 2018.
Net Cash Provided by Financing Activities was $378.3 million for the year ended December 31, 2020, compared to net cash provided of $160.8 million for the same period in 2019. Net proceeds from Policyholder Obligations provided $162.2 million of cash for the year ended December 31, 2020 compared to $232.2 million for the year ended December 31, 2019. Kemper issued no common stock during the year ended December 31, 2020. Net proceeds from borrowing under the term loan facilities provided $395.6 million of cash for the year ended December 31, 2020, compared to $49.9 million for the year ended December 31, 2019. Kemper used $185.0 million of cash to repay long-term debt for the year ended December 31, 2019. Kemper did not repay long-term debt during 2020. Kemper used $110.4 million of cash to repurchase shares of its common stock during 2020. Kemper did not use any cash to repurchase shares of its common stock during 2019. Kemper used $78.9 million of cash to pay dividends for the year ended December 31, 2020, compared to $67.8 million of cash used to pay dividends in the same period of 2019. The quarterly dividend rate was $0.30 for each quarter of 2020. The quarterly dividend rate was $0.25 per common share for the first three quarters of 2019 and $0.28 for the fourth quarter of 2019.
Net Cash Provided by Financing Activities was $160.8 million for the year ended December 31, 2019, compared to net cash used of $12.2 million for the same period in 2018. Net proceeds from the issuance of long-term debt, which was used to fund the acquisition of Infinity, provided $49.9 million of cash for the year ended December 31, 2019. Kemper used $185.0 million of cash to repay long-term debt for the year ended December 31, 2019. Kemper did not use any cash during 2019 or 2018 to repurchase shares of its common stock. Kemper used $67.8 million of cash to pay dividends for the year ended December 31, 2019, compared to $56.4 million of cash used to pay dividends in the same period of 2018. The quarterly dividend rate was $0.25 per common share for the first three quarters of 2019 and $0.28 for the fourth quarter of 2019. The quarterly dividend rate was $0.24 for each quarter of 2018.
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 $757.0 million for the year ended December 31, 2020, compared to $633.4 million in 2019. Net cash used to acquire short-term investments was $390.8 million for the year ended December 31, 2020, compared to net cash used to acquire short-term investments of $176.0 million in 2019. Fixed Maturities investing activities used net cash of $320.9 million for the year ended December 31, 2020, compared to net cash used of $55.8 million in 2019. Equity Securities investing activities provided net cash of $115.3 million for the year ended December 31, 2020, compared to net cash used of $89.7 million in 2019. Equity Method Limited Liability Investments investing activities used net cash of $0.8 million for the year ended December 31, 2020, compared to $44.2 million in 2019.
Estimated cash disbursements pertaining to the Company’s contractual obligations at December 31, 2020 are presented below.
Amounts included in Life and Health Insurance Policy Benefits within the contractual obligations table above represent the estimated cash payments to be made to policyholders and beneficiaries. Such cash outflows are based on the Company’s current assumptions for mortality, morbidity and policy lapse, but are undiscounted with respect to interest. Policies must remain in force for the policyholder or beneficiary to receive the benefit under the policy. Depending on the terms of a particular policy, future premiums from the policyholder may be required for the policy to remain in force. The Company estimates that future cash inflows would total $4.2 billion using the same assumptions used to estimate the cash outflows. The Company’s Life Insurance Reserves in the Company’s Consolidated Balance Sheets are generally based on the historical assumptions for mortality and policy lapse rates and are on a discounted basis. Accordingly, the sum of the amounts presented above for Life and Health Insurance Policy Benefits significantly exceeds the amount of Life and Health Insurance Reserves reported on the Company’s Consolidated Balance Sheet at December 31, 2020.
In addition to the purchase obligations included above, the Company had certain investment commitments totaling $303.8 million at December 31, 2020. The funding of such investment commitments is dependent on a number of factors, the timing of which is indeterminate. The Company cannot make a reasonably reliable estimate of the amount and period of related future payments, if any, for such liability. Other Contractual Obligations Reflected in Long Term Liabilities on the Consolidated Balance Sheets under GAAP primarily consist of interest obligations related to Long Term Debt Obligations.
Kemper’s subsidiaries conduct their operations in two industries: property and casualty insurance and life and health insurance. Accordingly, the Company is subject to several industry-specific accounting principles under GAAP. The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The process of estimation is inherently uncertain. Accordingly, actual results could ultimately differ materially from the estimated amounts reported in a company’s financial statements.
The reported value of the Company’s investments was $10,424.1 million at December 31, 2020, of which $8,504.3 million, or 82%, was reported at fair value, $225.3 million, or 2%, was reported under the equity method of accounting, $297.9 million or 3%, was reported at unpaid principal balance and $1,396.6 million, or 13%, was reported at cost, modified cost or depreciated cost. Investments, in general, are exposed to various risks, such as interest rate risk, credit risk and overall market volatility risk. Accordingly, it is reasonably possible that changes in the fair values of the Company’s investments reported at fair value will occur in the near term and such changes could materially affect the amounts reported in the financial statements. Also, it is reasonably possible that changes in the carrying values of the Company’s Equity Method Limited Liability Investments will occur in the near term and such changes could materially affect the amounts reported in the financial statements because these issuers follow specialized industry accounting rules which require that they report all of their investments at fair value (See Item
As more fully described under the heading, “Fair Value Measurements,” in Note 2, “Summary of Accounting Policies and Accounting Changes,” to the Consolidated Financial Statements, the Company uses a hierarchical framework which prioritizes and ranks the market observability used in fair value measurements.
Had the Company elected the fair value option for all of its investments in financial instruments, the Company’s reported net income for the year ended December 31, 2020, would have increased by $292.3 million.
Such reviews are inherently uncertain in that the value of the investment may not fully recover or may decline further in future periods. Some factors considered in evaluating whether or not a decline in fair value of an investment exist include, but are not limited to, the following:
•The ability of the issuer to make scheduled principal and interest payments;
•Changes in the mix of business by state, class and policy limit within product line;
•Repair costs, including, but not limited to, the impact of inflation and the availability of labor and materials;
•Changes in the judicial environment, including, but not limited to, the interpretation of policy provisions, the impact of jury awards and changes in case law; and
The final step in the quarterly loss and LAE reserving process involves a comprehensive review of the actuarial indications by the Company’s chief 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 quarter or 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 does not have access to the underlying data and, accordingly, relies on calculations provided by such pools.
The Company’s goal is to ensure that its total reserves for property and casualty insurance losses and LAE are adequate to cover all costs, while sustaining minimal variation from the time reserves for losses and LAE are initially estimated until losses and LAE are fully paid. Changes in the Company’s estimates of these losses and LAE over time, also referred to as “development,” will occur and may be material. Favorable development is recognized and reported in the Consolidated Financial Statements when the Company decreases its previous estimate of ultimate losses and LAE and results in an increase in net income in the period recognized, whereas adverse development is recognized and reported in the Consolidated Financial Statements when the Company increases its previous estimate of ultimate losses and LAE and results in a decrease in net income.
Although development will emerge in all of the Company’s product lines, development in the Company’s specialty personal automobile insurance product line could have the most significant impact due to the relative size of its loss and LAE reserves. To further illustrate the sensitivity of the Company’s reserves for specialty personal automobile insurance losses and LAE, the Company measures the standard deviation of the mean reserve estimate using a bootstrapping methodology. The Company
A change in any one or more of these assumptions is likely to result in a projected benefit obligation or pension cost that differs from the actuarial estimates at December 31, 2020. Such changes in estimates may be material.
Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, the FASB Accounting Standards Codification (“ASC”) is the sole source of authoritative GAAP recognized by the Financial Accounting Standards Board (“FASB”) that is applicable to the Company. The FASB issues ASUs to amend the authoritative literature in ASC.
The Company has adopted all recently issued accounting pronouncements with effective dates prior to January 1, 2020. See Note 2, “Summary of Accounting Policies and Accounting Changes” to the Consolidated Financial Statements for discussion on adoption of these ASUs and impacts to the Company’s financial statements, which were not material. For all recently issued accounting pronouncements with effective dates after December 31, 2020, the Company does not expect adoption to have a material impact on its financial statements, with the possible exception of ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to Accounting for Long-Duration Contracts.
Consolidated Statements of Income for the Years Ended December 31, 2020, 2019 and 2018 70
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 73
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2020, 2019 and 2018 74
Periodically, Kemper may acquire an additional company which then becomes one of the various subsidiaries of Kemper. When an acquisition occurs, Kemper will include the results of the acquired company in the consolidated financial results from the date of its acquisition and forward.
Certain prior year amounts for company-owned life insurance (“COLI”) have been reclassified from Other Assets to Other Investments to conform to the current presentation.
Certain prior year amounts in the Consolidated Statements of Cash Flows have been reclassified to conform to the current presentation.
Investments in Convertible Securities include fixed maturities with equity conversion features. The Company has elected the fair value option method of accounting for investments in Convertible Securities and records Convertible Securities at fair value
on the Consolidated Balance Sheets. Changes in fair value of Convertible Securities are recorded in the Consolidated Statements of Income during the period such changes occur.
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 Sheets 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.
Equity Method Limited Liability Investments include investments in limited liability investment companies and limited partnerships in which the Company’s interests are not deemed minor and are accounted for under the equity method of accounting whereby changes in net asset values are recorded in Net Investment Income in the Consolidated Statements of Income. Certain partnerships for which results are not available on a timely basis are reported on a lag.
Short-term Investments include certificates of deposit and other fixed maturities that mature within one year from the date of purchase, U.S. Treasury bills, money market mutual funds and overnight interest-bearing accounts. Short-term Investments are reported at cost, which approximates fair value.
The following accounting policy has been updated effective January 1, 2020 to reflect the Company's adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments as described above.
For fixed maturity investments that the Company intends to sell or for which it is more likely than not that the Company will be required to sell before an anticipated recovery of value, the full amount of the impairment is reported in Impairment Losses. The Company writes down the investment’s amortized cost to its fair value, and will not adjust for any subsequent recoveries.
For fixed maturity investments that the Company does not intend to sell or for which it is more likely than not that the Company will not be required to sell before an anticipated recovery of value, the Company will evaluate whether a decline in fair value below the amortized cost basis has occurred from a credit loss or other factors (non-credit related). Considerations in
the credit loss assessment include (1) extent to which the fair value has been less than amortized cost, (2) conditions related to the security, an industry, or a geographic area, (3) payment structure of the investment and the likelihood of the issuer's ability
Any increase or decrease in the expected allowance for credit losses related to investments is recognized in Impairment Losses. The expected allowance for credit losses is limited by the amount that the fair value is less than the amortized cost basis and is adjusted for any additional expected credit losses or subsequent recoveries. The amortized cost basis of the investment is not adjusted for the expected allowance for credit loss. The impairment related to other factors (non-credit related) is reported in Other Comprehensive Income, net of applicable taxes.
•Level 3 - Significant unobservable inputs for the asset or liability being measured.
Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those cases, the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level of input that is significant to the entire measurement. Such determination requires significant management judgment.
For traditional life insurance products, the reserves for future policy benefits are estimated on the net level premium method using assumptions as of the issue date for mortality, interest, policy lapses and expenses, including provisions for adverse deviations. These assumptions vary by such characteristics as plan, age at issue and policy duration. Mortality assumptions are based on the Company’s historical experience and industry standards. Interest rate assumptions principally range from 3% to 7%. Lapse rate assumptions are based on actual and industry experience. Insurance Reserves for life insurance products are comprised of reserves for future policy benefits plus an estimate of the Company’s liability for unpaid life insurance claims and claims adjustment expenses, which includes an estimate for IBNR life insurance claims. Prior to 2016, except when required by applicable law, the Company did not utilize the database of reported deaths maintained by the Social Security Administration or any other comparable database (a “Death Master File” or “DMF”) in its operations, including to determine its IBNR liability for life insurance products. Instead of using such a database, the Company calculated its IBNR liability for life insurance products using Company-specific historical information, which included analyzing average paid claims and the average lag between date of death and the date reported to the Company for claims for which proof of death had been provided. In 2016, the Company initiated a voluntary enhancement of its claims handling procedures for its life insurance policies. The Company is now utilizing a DMF to identify potential situations where the Company has yet to be notified of an insured’s death and, as appropriate, initiating an outreach process to identify and contact beneficiaries and settle claims. Policyholders’ Benefits and Incurred Losses and Loss Adjustment Expenses for the year ended December 31, 2016 included a charge of $77.8 million to recognize the initial impact of using a DMF in the Company’s operations, including to determine its IBNR liability for unpaid claims and claims adjustment expenses for life insurance products.
Policyholder Obligations include Federal Home Loan Bank (“FHLB”) funding agreements used for spread lending purposes and universal life-type policyholder contracts and are stated at account balances.
Management estimates the allowance using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience on the receivables from policyholders provide the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current environmental conditions, primarily unemployment rates that could impact an insured’s ability to pay premiums.
Other Receivables primarily include reinsurance recoverables and accrued investment income. Reinsurance Recoverables were $50.1 million and $122.6 million at December 31, 2020 and 2019, respectively. Accrued Investment Income was $77.1 million and $78.7 million at December 31, 2020 and 2019, respectively.
Other Assets primarily include property and equipment, internal use software, right-of-use assets, insurance licenses acquired in business combinations, the value of other intangible assets acquired 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.
The Company accounts for the value of business acquired (“VOBA”) based on actuarial estimates of the present value of future cash flows embedded in insurance in force as of an acquisition date. VOBA was $20.3 million and $24.1 million at December 31, 2020 and 2019, respectively. VOBA is amortized over the expected profit emergence period of the policies in force as of the acquisition date. The Company evaluates VOBA assets for recoverability annually.
The Company accounts for the future profits embedded in customer relationships (“Customer Relationships”) acquired based on the present value of estimated future cash flows from such relationships. Customer Relationships was $3.4 million and $4.3 million at December 31, 2020 and 2019, respectively, and are amortized on a straight-line basis over the estimated useful life of the relationship. Customer Relationships are 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.
The Company accounts for the present value of the future profits embedded in broker or agent relationships acquired (“Agent Relationships”) based on the present value of estimated future cash flows from such acquired relationships or, using the cost recovery method, which estimates the ultimate cost to build a comparable distribution network. Agent Relationships was $57.6 million and $62.5 million at December 31, 2020 and 2019, respectively, and are amortized on a straight-line basis over the estimated useful life of the relationship. Agent Relationships are 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 April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. ASU 2019-04 clarifies certain aspects of accounting for credit losses, hedging activities, and financial instruments, previously addressed by ASU 2016-13, Measurement of Credit Losses on Financial Instruments, ASU 2017-12, Targeted Improvements to Derivatives and Hedging Activities, and ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The Company adopted ASU 2017-12 in the first quarter of 2019. Accordingly, the amendments in ASU 2019-04 related to clarifications on accounting for hedging activities are effective for the Company in the first quarter of 2020. The amendments of ASU 2019-04 related to ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, and ASU 2016-13, Measurement of Credit Losses on Financial Instruments, are effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. The initial adoption of ASU 2019-04 did not have a material effect on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to Accounting for Long-Duration Contracts. ASU 2018-12 amends the accounting model for certain long-duration insurance contracts and requires the insurer to provide additional disclosures in annual and interim reporting periods. In November 2020, the FASB issued ASU 2020-11 which deferred the effective date of ASU 2018-12 by one year for public business entities. ASU 2018-12 is now effective for fiscal years beginning after December 15, 2022, and interim periods within those annual periods. The amendments in ASU 2018-12 (i) require cash flow assumptions used to measure the liability for future policy benefits for nonparticipating traditional and limited pay long duration contracts to be updated at least annually with the recognition and remeasurement recorded in net income, (ii) simplify the amortization of deferred acquisition costs to be amortized on a constant level basis over the expected term of the contract, (iii) require all market risk benefits to be measured at fair value, and (iv) enhance certain presentation and disclosure requirements which include disaggregated rollforwards for liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities, deferred acquisition costs, and information about significant inputs, judgements and methods used in the measurement. The Company plans to adopt using the modified retrospective transition method and is currently evaluating the impact of this guidance on its financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to simplify accounting for income taxes by eliminating certain exceptions to the guidance in ASC Topic 740, Income Taxes, related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. Further, ASU 2019-12 clarifies that single-member limited liability companies and similar disregarded entities that are not subject to income tax are not required to recognize an allocation of consolidated income tax expense in their separate financial statements, but they could elect to do so. ASU 2019-12 is effective for annual periods beginning after December 15, 2020 and interim periods within those annual periods. The adoption of this guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements. The Company will continue to evaluate the impact of this guidance on its financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues), which clarifies the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. ASU 2020-01 is effective for annual periods beginning after December 15, 2020 and interim periods within those annual periods. The adoption of this guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The guidance in ASU 2020-04, if elected, shall apply to contract modifications if the terms that are modified directly replace, or have the potential to replace, a reference rate with another interest rate index. If other terms are contemporaneously modified in a manner that changes, or has the potential to change, the amount or timing of contractual cash flows, the guidance in ASU 2020-04 shall apply only if those modifications are related to the replacement of a reference rate. ASU 2020-04 is effective for contract modifications made between March 12, 2020 through December 31, 2022. The adoption of the new guidance did not have an impact on the Company’s Consolidated Financial Statements. The Company will continue to evaluate the impact of this guidance on its financial statements.
In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs, which clarifies that an entity should re-evaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. ASU 2020-08 is effective for annual periods beginning after December 15, 2020 and interim periods within those annual periods. The adoption of this guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.
The Company has adopted all other recently issued accounting pronouncements with effective dates prior to January 1, 2020. There were no adoptions of such accounting pronouncements during the year ended December 31, 2020 that had a material impact on the Company’s Consolidated Financial Statements.
AAC, headquartered in Downers Grove, Illinois, provides specialty private passenger auto insurance in Arizona, Illinois, Indiana, Nevada, and Texas. AAC wrote over $370.0 million of direct premiums in 2019 through a network of approximately 500 independent agents and over 110 captive agents.
The expected maturities of the Company’s Investments in Fixed Maturities may differ from the contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Investment-grade fixed maturity investments comprised $8.0 million and below-investment-grade fixed maturity investments comprised $23.7 million of the unrealized losses on investments in fixed maturities at December 31, 2020. For below-investment-grade fixed maturity investments in an unrealized loss position, the unrealized loss amount, on average, was approximately 11% of the amortized cost basis of the investment.
Based on the Company’s evaluation at December 31, 2019 of the prospects of the issuers, including, but not limited to, the credit ratings of the issuers of the investments in the fixed maturities, and the Company’s intention to not sell and its determination that it would not be required to sell before recovery of the amortized cost of such investments, the Company concluded that the declines in the fair values of the Company’s investments in fixed maturities presented in the preceding table were temporary at the evaluation date.
The following table sets forth the change in allowance for credit losses on fixed maturities available-for-sale by major security type for the year ended December 31, 2020.
Equity securities with readily-determinable fair values, including equity securities which the Company previously classified as Fair Value Option Investments, are classified as Equity Securities at Fair Value in the Consolidated Balance Sheets with changes in fair value recorded as Income from Change in Fair Value of Equity and Convertible Securities in the Consolidated Statements of Income. Net unrealized gains arising during the year-ended December 31, 2020 and recognized in earnings, related to such investments still held as of December 31, 2020 were $136.6 million.
In 2020 and 2019, aggregate investment income (losses) from Equity Method Limited Liability Investments exceeded 10% of the Company’s pretax consolidated net income. Accordingly, the Company is disclosing aggregated summarized financial data for its Equity Method Limited Liability Investments for all periods presented in the Consolidated Financial Statements. Such aggregated summarized financial data does not represent the Company’s proportionate share of the Equity Method Limited Liability Investment assets or earnings. Aggregate total assets of the Equity Method Limited Liability Investments in which the Company invested totaled $3,554.5 million, $2,368.1 million and $2,805.3 million, as of December 31, 2020, 2019 and 2018, respectively. Aggregate total liabilities of the Equity Method Limited Liability Investments in which the Company invested totaled $1,602.5 million, $817.2 million and $1,030.7 million, as of December 31, 2020, 2019 and 2018, respectively. Aggregate net income of the Equity Method Limited Liability Investments in which the Company invested totaled $74.9 million, $78.0 million and $130.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. The aggregate summarized financial data is based on the most recent and sufficiently-timely financial information available to the Company as of the respective reporting dates and periods. The Company’s maximum exposure to loss at December 31, 2020 is limited to the total carrying value of $225.3 million. In addition, the Company had outstanding commitments totaling approximately $172.8 million to fund Equity Method Limited Liability Investments at December 31, 2020. At December 31, 2020, 4.4% of Equity Method Limited Liability Investments were reported without a reporting lag. 8.0% of the total carrying value were reported with a one month lag and the remainder were reported with more than a one month lag.
The Company records intangible assets acquired in business combinations and certain costs incurred developing and customizing internal-use software within Other Assets on the Consolidated Balance Sheets. Definite life intangible assets are amortized over the estimated profit emergence period or estimated useful life of the asset. Indefinite life intangible assets are not amortized, but rather tested annually for impairment. In 2020 and 2019, the Company recognized amortization expense on definite life intangible assets of $42.3 million and $37.8 million, respectively.
The Company’s actuaries estimate ultimate losses and LAE and, therefore, reserves at least quarterly for most product lines and/or coverage levels using accident quarters or years 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 to estimate the ultimate losses and LAE for the current accident quarter or year and re-estimate the ultimate losses and LAE for previous accident quarters or years to determine if changes in the previous estimates of the ultimate losses and LAE are indicated by the most recent data.
The following tables contain information about incurred and paid claims development as of and for the year ended December 31, 2020, net of reinsurance and indemnification, as well as cumulative claim frequency and the total of IBNR liabilities, including expected development on reported claims included within the net incurred losses and allocated LAE amounts. The tables are grouped by major product line and, if relevant, coverage. The information about incurred and paid claims development for the years ended December 31, 2016 through 2019 is presented as supplementary information and is unaudited.
Property and Casualty Insurance Reserve activity for the years ended December 31, 2020, 2019 and 2018 was:
In 2019, the Company decreased its property and casualty insurance reserves by $71.1 million to recognize favorable development of loss and LAE reserves from prior accident years. Specialty Personal Automobile insurance loss and LAE reserves developed favorably by $23.8 million due primarily to the emergence of more favorable loss patterns than expected for both liability and physical damage insurance for the 2018 accident year. Commercial lines insurance loss and LAE reserves included favorable development of $12.9 million due primarily to the emergence of more favorable loss patterns than expected for commercial automobile liability insurance for 2018 and 2017 accident years. Preferred Personal Automobile insurance loss and LAE reserves developed favorably by $8.2 million due primarily to the emergence of more favorable loss patterns than expected for liability insurance for several prior accident years and for physical damage insurance for 2018 accident year. Homeowners insurance loss and LAE reserves developed favorably by $19.7 million due primarily to the net reinsurance impact from the sale of subrogation rights related to the 2017 and 2018 California Wildfires. Other personal lines loss and LAE reserves developed favorably by $6.5 million due primarily to the emergence of more favorable loss patterns than expected for prior accident years.
In 2018, the Company increased its property and casualty insurance reserves by $7.4 million to recognize favorable development of loss and LAE reserves from prior accident years. Specialty Personal Automobile insurance loss and LAE reserves developed adversely by $5.5 million due primarily to the emergence of loss patterns that were worse than expected for both physical damage and liability insurance for the 2017 accident year, partially offset by the emergence of loss patterns that were better than expected for 2016 and prior accident years. Commercial lines insurance loss and LAE reserves developed favorably by $6.1 million. Preferred Personal automobile insurance loss and LAE reserves developed favorable by $5.8 million due primarily to the emergence of loss patterns that were better than expected for both physical damage and liability insurance for the 2017 accident year and, to a lesser extent, for liability insurance for the 2015 and prior accident years, partially offset by the emergence of loss patterns that was worse than expected for the 2016 accident year. Homeowners insurance loss and LAE reserves developed adversely by $3.2 million due primarily to the emergence of non-catastrophe loss patterns that were worse than expected for the 2016 accident year. Other personal lines loss and LAE reserves developed favorably by $4.3 million due primarily to the emergence of more favorable loss patterns than expected for prior accident years.
Reinsurance recoverables on property and casualty insurance reserves were $50.1 million and $65.6 million at December 31, 2020 and 2019, respectively. These recoverables are concentrated with several reinsurers, the majority of which are highly rated by one or more of the principal investor and/or insurance company rating agencies. While most of these recoverables were unsecured at December 31, 2020 and 2019, the agreements with the reinsurers generally provide for some form of collateralization upon the occurrence of certain events
Kemper’s subsidiary, United Insurance has entered into funding agreements with the FHLB of Chicago in exchange for cash, which it uses for spread lending purposes. United Insurance received advances of $466.4 million from the FHLB of Chicago and made repayments of $302.0 million under the spread lending program in 2020. United Insurance received advances of $614.5 million and made repayments of $381.1 million under the spread lending program in 2019.
When a funding agreement is issued, United Insurance is then required to post collateral in the form of eligible securities including mortgage-backed, government, and agency debt instruments for each of the advances that are entered. The fair value of the collateral pledged must be maintained at certain specified levels above the borrowed amount, which can vary depending
United Insurance’s liability under the funding agreements with the FHLB of Chicago, the amount of collateral pledged under such agreements and FHLB of Chicago common stock owned by United Insurance at December 31, 2020 and 2019 is presented below.
Infinity’s liabilities at the acquisition date included $275.0 million principal amount, 5.000% Senior Notes due September 19, 2022 (the “2022 Senior Notes”). The 2022 Senior Notes were recorded at fair value as of the acquisition date, $282.1 million, with the $7.1 million premium being amortized as a reduction to interest expense over the remaining term, resulting in an effective interest rate of 4.36%. On November 30, 2018, Kemper executed a guarantee to fully and unconditionally guarantee the payment and performance obligations of the 2022 Senior Notes.
Kemper has $450.0 million aggregate principal of 4.350% senior notes due February 15, 2025 (the “2025 Senior Notes”) outstanding as of December 31, 2020. Kemper initially issued $250.0 million of the notes in February of 2015 and issued an additional $200.0 million of the notes in June of 2018. 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. 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.
On September 22, 2020, Kemper offered and sold $400.0 million aggregate principal of 2.400% senior notes due September 30, 2030 (the “2030 Senior Notes”). The net proceeds of issuance were $395.6 million, net of discount and transaction costs for an effective yield of 2.52%. The 2030 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. Kemper is using the net proceeds from the issuance for general corporate purposes.
Significant judgments and assumptions for determining lease asset and liability as December 31, 2020 and December 31, 2019 respectively are presented below.
On May 6, 2020, Kemper’s Board of Directors authorized the repurchase of up to an additional $200.0 million of Kemper common stock, in addition to the $243.7 million remaining under the previous authorization as of December 31, 2019. As of December 31, 2020, the remaining share repurchase authorization was $333.3 million under the repurchase program. During the year ended December 31, 2020, Kemper repurchased and retired 1.6 million shares of its common stock in open market transactions under its share repurchase authorization for an aggregate cost of $110.4 million and average cost per share of $68.29.
During the second quarter of 2019, the Company’s stockholders approved the adoption of the Kemper Employee Stock Purchase Plan (“ESPP”) and the reservation of 1.3 million shares for issuance under the ESPP.
Various state insurance laws restrict the amount that an insurance subsidiary may pay in the form of dividends, loans or advances without the prior approval of regulatory authorities. Also, that portion of an insurance subsidiary’s net equity which results from differences between statutory insurance accounting practices and GAAP would not be available for cash dividends, loans or advances. Kemper’s insurance subsidiaries paid dividends of $322.0 million to Kemper in 2020. In 2021, Kemper’s insurance subsidiaries would be able to pay $402.8 million in dividends to Kemper without prior regulatory approval. Kemper’s insurance subsidiaries had net assets of $4.4 billion, determined in accordance with GAAP, that were restricted from payment to Kemper without prior regulatory approval at December 31, 2020.
Kemper’s insurance subsidiaries are also required to hold minimum levels of statutory capital and surplus to satisfy regulatory requirements. The minimum statutory capital and surplus, or company action level risk-based capital (“RBC”), necessary to satisfy regulatory requirements for the Company’s life and health insurance subsidiaries collectively was $158.1 million at December 31, 2020. The minimum statutory capital and surplus necessary to satisfy regulatory requirements for the Company’s property and casualty insurance subsidiaries collectively was $586.6 million at December 31, 2020. Company action level RBC is the level at which a company is required to file a corrective action plan with its regulators and is equal to 200% of the authorized control level RBC.
In 2020, Kemper paid dividends of $78.9 million to its shareholders. Except for certain financial covenants under Kemper’s credit agreement or during any period in which Kemper elects to defer interest payments, there are no restrictions on Kemper’s ability to pay dividends to its shareholders. Certain financial covenants, namely minimum net worth and a maximum debt to total capitalization ratio, under Kemper’s credit agreement could limit the amount of dividends that Kemper may pay to shareholders at December 31, 2020. Kemper had the ability to pay without restrictions $1.5 billion in dividends to its shareholders and still be in compliance with all financial covenants under its credit agreement at December 31, 2020.
On May 5, 2020, Kemper’s shareholders approved the 2020 Omnibus Equity Plan (“2020 Omnibus Plan”). A maximum number of 7,000,000 shares of Kemper common stock may be issued under the 2020 Omnibus Plan (the “Share Authorization”). After the approval date of the 2020 Omnibus Plan, no new awards will be granted under the 2011 Omnibus Equity Plan (“2011 Omnibus Plan”) that had been approved by Kemper’s Shareholders on May 4, 2011, but awards previously granted under the 2011 Omnibus Plan remain outstanding in accordance with their original terms. As of December 31, 2020, there were 6,734,289 common shares available for future grants under the 2020 Omnibus Plan, of which 1,534,158 shares were reserved for future grants based on the performance results under the terms of outstanding performance share units (“PSUs”).
For grants under the 2020 Omnibus Plan, and for grants under the 2011 Plan beginning in November 2017, recipients of RSUs and PSUs receive dividend equivalents on the same basis as all other outstanding shares of Kemper common stock only if, to the extent, and at the time that they vest and on subsequent dividend payment dates after they vest until the awards are settled, and do not receive voting rights until such shares are issued.
For awards subject to a performance condition, the Company recognizes compensation expense based upon the probable outcome of the performance condition, which on the grant date reflects an estimate of attaining 100% of the performance units granted. The estimate is revised if the actual number of PSUs expected to vest is likely to differ from the previous estimate. Compensation expense for awards is recognized on a straight-line basis over the requisite service period. For equity-based compensation awards with a graded vesting schedule, the Company recognizes compensation expense on a straight-line basis over the requisite service period for each separately-vesting portion of the awards as if each award were, in substance, multiple awards. Compensation expense is recognized only for those awards expected to vest, with forfeitures estimated at the date of grant based on the Company’s historical experience and future expectations. Equity-based compensation expense was $24.9 million, $25.3 million and $18.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. Total unamortized compensation expense related to unvested awards at December 31, 2020 was $24.6 million, which is expected to be recognized over the next three years ending December 31, 2021, 2022 and 2023.
awards are settled. Each Non-employee Director elected at the 2019 annual shareholder meeting received an annual Director RSU award with an aggregate grant date fair value of $130,000 at the conclusion of the meeting, and, each Non-employee
Director elected at the 2018 annual shareholder meeting received an annual DSU award with an aggregate grant date fair value of $110,000 at the conclusion of the meeting, under the Non-employee Director compensation program in effect for the applicable year. The DSUs granted to Non-employee Directors are fully vested on the date of grant and include the right to receive full dividend equivalents on the same basis as all other outstanding shares of Kemper common stock. Conversion of the DSUs into shares of Kemper’s common stock is deferred until the date a director’s board service terminates.
The Company uses the Black-Scholes option pricing model to estimate the fair value of each Tandem Award on the date of grant. The expected terms of Tandem Awards are developed by considering the Company’s historical Tandem Award exercise experience, demographic profiles, historical share retention practices of employees and assumptions about their propensity for early exercise in the future. Expected volatility is estimated using weekly historical volatility. The Company believes that historical volatility is currently the best estimate of expected volatility. The dividend yield in 2020, 2019 and 2018 was calculated by taking the natural logarithm of the annualized yield divided by the Kemper common stock price on the date of grant. The risk-free interest rate was the yield on the grant date of U.S. Treasury zero coupon issues with a maturity comparable to the expected term of the option.
Information pertaining to Tandem Awards outstanding at December 31, 2020 is presented below.
Activity related to nonvested RSUs for the year ended December 31, 2020 is presented below.
•exceeds the “target” performance level, all of the PSUs will vest and additional shares of stock will be issued to the award recipient;
•is below a “minimum” performance level, none of the PSUs originally issued to the award recipient will vest.
The number of additional shares that would be granted if the Company were to meet or exceed the maximum performance levels related to the outstanding PSU awards for the 2020, 2019 and 2018 three-year performance periods was 248,890 common shares, 134,858 common shares and 127,638 common shares, respectively, (as “full value awards,” the equivalent of 746,670 shares, 404,574 shares, and 382,914 shares, respectively, under the Share Authorization) at December 31, 2020.
The grant date fair values of the PSU awards with a market performance condition are determined using the Monte Carlo simulation method. The Monte Carlo simulation model produces a risk-neutral simulation of the daily returns on the common stock of Kemper and each of the other companies included in the peer group. Returns generated by the simulation depend on the risk-free interest rate used and the volatilities of, and the correlation between, these stocks. The model simulates stock prices and dividend payouts to the end of the three-year performance period. Total shareholder returns are generated for each of these stocks based on the simulated prices and dividend payouts. The total shareholder returns are then ranked, and Kemper’s simulated ranking is converted to a payout percentage based on the terms of the PSU awards. The payout percentage is applied to the simulated stock price at the end of the performance period, reinvested dividends are added back, and the total is discounted to the valuation date at the risk-free rate. This process is repeated approximately ten thousand times, and the grant date fair value is equal to the average of the results from these trials.
Sixty-seven percent of the PSU awards granted to employees in 2020, and fifty percent of the PSU awards granted to employees in 2019 and 2018 are measured using a market performance condition. Fair value for these awards was estimated using the Monte Carlo simulation method described above. Final payout for these awards, and any forfeitures of units for performance below the “target” performance level, will be 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 a three-year performance period. The three-year performance periods for the 2020, 2019 and 2018 awards end on January 31, 2023, January 31, 2022 and January 31, 2021, respectively. 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.
The grant-date fair values of DSU awards granted to Non-employee Directors are determined using the closing price of Kemper common stock on the date of grant. The total fair value of DSUs that vested during the years ended December 31, 2020, 2019, and 2018 was $0.0 million, $0.0 million and $1.0 million, respectively.
The number of shares of Kemper common stock that were excluded from the calculations of Equity-based Compensation Equivalent Shares and Weighted-average Unrestricted Shares and Equivalent Shares Outstanding Assuming Dilution for the years ended December 31, 2020, 2019 and 2018, because the effect of inclusion would be anti-dilutive, is presented below.
NOTE 13. OTHER COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE INCOME (Continued)
Components of AOCI were reclassified to the following lines of the Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018:
Net Investment Income for the years ended December 31, 2020, 2019 and 2018 was:
Other Receivables includes accrued investment income of $77.1 million and $78.7 million at December 31, 2020, and 2019, respectively.
The components of Impairment Losses reported in the Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018 were:
A reconciliation of the beginning and ending amount of Unrecognized Tax Benefits for the years ended December 31, 2020, 2019 and 2018 is presented below.
The components of Income Tax Expense from Continuing Operations for the years ended December 31, 2020, 2019 and 2018 were:
Income taxes paid, net of income tax refunds received, were $55.8 million, $68.1 million, and $0.2 million in 2020, 2019, and 2018, respectively.
The weighted-average discount rate and rate of increase in future compensation levels used to estimate the components of the Projected Benefit Obligation for the Pension Plan at December 31, 2020 and 2019 were:
Asset allocations for the Pension Plan at December 31, 2020 and 2019 by asset category were:
Additional information pertaining to the changes in the fair value of the Pension Plan’s assets classified as Level 3 in the two preceding tables for the years ended December 31, 2020 and 2019 is presented below.
The components of Comprehensive Pension Expense (Income) for the Pension Plan for the years ended December 31, 2020, 2019 and 2018 were:
The Company also sponsors several defined contribution benefit plans covering most of its employees. The Company made contributions to those plans of $26.1 million, $26.0 million and $15.1 million in 2020, 2019 and 2018, respectively.
Kemper and Infinity sponsor other than pension postretirement employee benefit plans (“OPEB”) that together provide medical, dental and/or life insurance benefits to approximately 575 retired and 500 active employees.
Changes in Fair Value of Plans’ Assets and Changes in Accumulated Postretirement Benefit Obligation for the years ended December 31, 2020 and 2019 were:
The weighted-average discount rate and rate of increase in future compensation levels used to develop the components of the Accumulated Postretirement Benefit Obligation at December 31, 2020 and 2019 were:
The Company estimates that OPEB Expense for the year ended December 31, 2021 will include income of $2.8 million resulting from the amortization of the related accumulated actuarial gain and prior service credit included in AOCI at December 31, 2020.
The weighted-average discount rate and rate of increase in future compensation levels used to develop OPEB Expense for the years ended December 31, 2020, 2019 and 2018 were:
The Company expects to contribute $1.3 million, net of the expected Medicare Part D subsidy, to its OPEB Plan to fund benefit payments in 2021.
Segment Operating Profit, including a reconciliation to Income from Continuing Operations before Income Taxes, for the years ended December 31, 2020, 2019 and 2018 was:
Coverage provided under the 2020 aggregate property catastrophe reinsurance contract is summarized below.
Reinsurance premiums for the Company’s catastrophe reinsurance programs and the FHCF Program reduced earned premiums for the years ended December 31, 2020, 2019 and 2018 by the following:
In 2018, the Company had reinsurance recoveries of $31.8 million under its catastrophe reinsurance programs primarily driven by the 2017 and 2018 California wildfires. In 2019, the Company entered into a sale of subrogation rights resulting in a reduction of the reinsurance recoveries of $15.5 million. In 2020, the reinsurance recoveries were further reduced by $1.5 million. The Life & Health Insurance segment had reinsurance recoveries of $0.0 million, $1.6 million and $1.6 million from the FHCF in 2020, 2019, and 2018, respectively.
Total catastrophe loss and LAE reserves, net of reinsurance recoverables, developed adversely by $0.2 million in 2020 and developed favorably by, $17.1 million and $8.4 million in 2019 and 2018, respectively. The Specialty Property & Casualty Insurance segment reported adverse catastrophe reserve development of $0.2 million and $0.5 million in 2020 and 2019, respectively and favorable catastrophe reserve development of $0.3 million in 2018. The Preferred Property & Casualty Insurance segment reported favorable catastrophe reserve development of $0.5 million, $18.4 million and $8.2 million in 2020, 2019 and 2018, respectively. The Life & Health Insurance segment reported adverse catastrophe reserve development of $0.5 million, $0.8 million, and $0.1 million in 2020, 2019 and 2018, respectively.
The process of estimating and establishing reserves for catastrophe losses is inherently uncertain and the actual ultimate cost of a claim, net of actual reinsurance recoveries, may vary materially from the estimated amount reserved. The Company’s estimates of direct catastrophe losses are generally based on inspections by claims adjusters and historical loss development experience for areas that have not been inspected or for claims that have not yet been reported. The Company’s estimates of direct catastrophe losses are based on the coverages provided by its insurance policies. The Company’s homeowners and dwelling insurance policies do not provide coverage for losses caused by floods, but generally provide coverage for physical damage caused by wind or wind-driven rain. Accordingly, the Company’s estimates of direct losses for homeowners and
Earned Premiums ceded on long-duration and short-duration policies were $31.2 million, $27.4 million and $31.6 million for the years ended December 31, 2020, 2019 and 2018, respectively, of which $26.7 million, $20.5 million and $20.5 million, respectively, was related to catastrophe reinsurance. See Note 20, “Catastrophe Reinsurance,” to the Consolidated Financial Statements for additional information regarding the Company’s catastrophe reinsurance programs. Certain insurance subsidiaries assume business from other insurance companies and involuntary pools. Earned Premiums assumed on long-duration and short-duration policies were $73.8 million, $92.3 million and $85.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The valuation of assets measured at fair value in the Company’s Consolidated Balance Sheet at December 31, 2020 is summarized below. The Company has no material liabilities that are measured and reported at fair value.
At December 31, 2020, the Company had unfunded commitments to invest an additional $130.8 million in certain limited liability investment companies and limited partnerships that will be included in Other Equity Interests when funded.
to prepare evaluations. In addition, the provider uses model processes to develop prepayment and interest rate scenarios. The pricing provider’s models and processes also take into account market convention. For each asset class, teams of its evaluators gather information from market sources and integrate relevant credit information, perceived market movements and sector news into the evaluated pricing applications and models. The Company generally validates the measurements obtained from its primary pricing provider by comparing them with measurements obtained from one additional pricing provider that provides either prices from recent market transactions, quotes in inactive markets or evaluations based on its own proprietary models.
The table below presents quantitative information about the significant unobservable inputs utilized by the Company in determining fair values for fixed maturity investments in corporate securities classified as Level 3 at December 31, 2019.
The Company’s policy is to recognize transfers between levels as of the end of the reporting period. There were no transfers between Levels 1 and 2 for the year ended December 31, 2020. Transfers into Level 3 of $9.0 million for the year ended December 31, 2020 were due to changes in the availability of market observable inputs. There were $637.6 million transfers out of Level 3 for the year ended December 31, 2020 due to availability of market observable inputs primarily within the collateralized loan obligations.
There were no transfers between Levels 1 and 2 for the year ended December 31, 2019. Transfers into Level 3 of $19.1 million for the year ended December 31, 2019 were due to changes in the availability of market observable inputs. There were no transfer out of Level 3 for the year ended December 31, 2019.
In the ordinary course of its businesses, the Company is involved in legal proceedings, including lawsuits, arbitrations, investigations, regulatory examinations, audits and inquiries. Except with regard to matters discussed below, based on currently available information, the Company does not believe that it is reasonably possible that any of its pending legal proceedings will have a material effect on the Company’s consolidated financial statements.
Over the last decade there have been initiatives that intend, in various ways, to impose new duties on life insurance companies to proactively search for information related to the deaths of their insureds. These initiatives, which include legislation, audits, regulatory examinations and litigation, seek to alter the terms of life insurance contracts by imposing requirements that did not exist and were not contemplated at the time the issuing companies entered into such contracts.
In 2016, the Company voluntarily began implementing a comprehensive process to compare the life insurance records of its life insurance subsidiaries against one or more death verification databases to determine if any of its insureds may be deceased; the process is continuing.
In 2015, Kemper’s subsidiary, Kemper Corporate Services, Inc. (“KCSI”), filed a demand for arbitration with the American Arbitration Association (“AAA”) against CSC, claiming that CSC had breached the terms of a master software license and services agreement and related agreements (collectively, the “Agreements”) by failing, among other things, to timely produce and deliver certain software to KCSI. In April 2017, CSC merged with a spin-off of the Enterprise Services business of Hewlett Packard Enterprise Company and is now known as DXC Technology Company.
In April 2017, the parties participated in an evidentiary hearing before a AAA-appointed arbitrator. In November 2017, the arbitrator awarded KCSI direct damages against CSC of $84.3 million, prejudgment interest at the annual rate of 9% and costs and expenses in the amount of $7.2 million.
Property and Casualty Insurance Reserves - Refer to Notes 2 and 6 to the consolidated financial statements
•We tested the underlying data, including historical claims, that served as the basis for the actuarial analyses to test that the inputs to the actuarial estimates were accurate and complete.
Investments in fixed maturity securities classified as available-for-sale are reported at fair value in the financial statements. Fixed maturity securities without readily determinable market values are valued using significant unobservable inputs, such as credit profile, credit spread and resulting market yield, which involve considerable judgment by management.
•We evaluated the reasonableness of the models, methodologies, and unobservable inputs used by management to estimate fair value.
•With the assistance of our fair value specialists, we compared management’s unobservable inputs to external sources, and for a sample of the investments, developed independent estimates of the fair value and compared our estimates to the Company’s estimates.