The Company leases four floors, or approximately 92,000 square feet, in an 83-story office building in Chicago, Illinois, for its corporate headquarters. The lease expires on December 31, 2033. Kemper’s property and casualty insurance subsidiaries lease facilities with an aggregate square footage of approximately 523,000 at 25 locations in nine states. The latest expiration date of the existing leases is in May 2026. Kemper’s life and health insurance subsidiaries lease facilities with aggregate square footage of approximately 470,000 at 124 locations in 28 states. The latest expiration date of the existing leases is in December 2025. Kemper’s corporate data processing operation leases a facility with aggregate square footage of approximately 30,000 square feet at one location in one state. The expiration date of the existing lease is in June 2021.
Net Income was $409.9 million ($6.24 per unrestricted common share) for the year ended December 31, 2020, compared to $531.1 million ($8.04 per unrestricted common share) for the year ended December 31, 2019.
Net Income decreased by $121.2 million in 2020, compared to 2019, due primarily to lower investment results, higher acquisition related transaction, integration and other costs and a pension noncash settlement charge, partially offset by higher Adjusted Consolidated Net Operating Income. Adjusted Consolidated Net Operating Income increased by $20.5 million in 2020, compared to 2019, due primarily to higher Specialty Property & Casualty Insurance Segment Net Operating Income and Corporate and Other Net Operating Income, partially offset by lower Preferred Property & Casualty Segment Insurance Net Operating Income and Life & Health Segment Insurance Net Operating Income.
In the Preferred Property & Casualty Insurance segment, 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. See MD&A, “Preferred Property & Casualty Insurance,” beginning on page 40 for additional discussion of the segment’s results.
Corporate and Other net operating income increased due primarily to a gain recognized for the satisfaction of the remaining balance of a final judgment against Computer Sciences Corporation (“CSC”) in connection with an arbitration award (the “CSC Judgment”), partially offset by higher acquisition related transaction, integration, and other costs and a pension noncash settlement charge.
The Company’s investment results were adversely impacted in 2020, compared to 2019, by a $52.7 million after-tax decrease from the change in fair value of the equity and convertible securities and a $3.0 million after-tax decrease from net realized gains on sales of investments, partially offset by $4.5 million after-tax of lower impairment losses. See MD&A, “Investment Results,” beginning on page 50 and MD&A, “Income Taxes,” beginning on page 57 and Note 23, “Contingencies.” to the Consolidated Financial Statements for additional discussion.
In the Specialty Property & Casualty Insurance segment, segment net operating income increased by $167.3 million due primarily to the inclusion of Infinity for twelve months of 2019 versus six months in 2018 and favorable underlying loss and prior year development. See MD&A, “Specialty Property & Casualty Insurance,” beginning on page 35 for additional discussion of the segment’s results.
In the Preferred Property & Casualty Insurance segment, segment net operating results increased by $16.2 million due primarily to lower incurred catastrophe losses and LAE (excluding loss and LAE reserve development) and favorable prior year loss and LAE development (including a one-time recovery on prior year catastrophes), partially offset by lower net investment income and higher underlying losses and LAE as a percentage of earned premiums. See MD&A, “Preferred Property & Casualty Insurance,” beginning on page 40 for additional discussion of the segment’s results.
In the Life & Health Insurance segment, segment net operating income increased by $7.2 million due primarily from a decrease in policyholders’ benefits and release in accrued reserves. See MD&A, “Life & Health Insurance,” beginning on page 46 for additional discussion of the segment’s results.
Corporate and Other net operating income decreased due primarily to a tax benefit as a result of the finalization of certain effects of Public Law 115-97, more commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), on deferred income taxes recognized in the third quarter of 2018 as well as lower gain recognized for the partial satisfaction of a final judgment against Computer Sciences Corporation (“CSC”). The Company’s investment results were favorably impacted in 2019, compared to 2018, by a $160.5 million after-tax increase from the change in fair value of the equity and convertible securities and a $12.2 million after-tax increase from net realized gains on sales of investments, partially offset by $7.3 million after-tax of higher impairment losses. See MD&A, “Investment Results,” beginning on page 50 and MD&A, “Income Taxes,” beginning on page 57 and Note 23, “Contingencies.” to the Consolidated Financial Statements for additional discussion.
Earned Premiums were $4,672.2 million in 2020, compared to $4,472.4 million in 2019, an increase of $199.8 million. Earned Premiums for the year ended December 31, 2020 included premium credits of $99.8 million related to COVID-19. Earned Premiums in the Specialty Property & Casualty Insurance segment increased by $256.9 million for the year ended December 31, 2020. Specialty Property & Casualty Insurance segment Earned Premiums for the year ended December 31, 2020 included premium credits of $87.1 million related to COVID-19. Earned Premiums in the Preferred Property & Casualty Insurance segment decreased by $62.1 million for the year ended December 31, 2020. Preferred Property & Casualty Insurance segment Earned Premiums for the year ended December 31, 2020 included premium credits of $12.7 million related to COVID-19. See MD&A, “Specialty Property & Casualty Insurance” and “Preferred Property & Casualty Insurance” for discussion of the changes in each segment’s earned premiums.
Other Income increased by $59.1 million for the year ended December 31, 2020, compared to the same period in 2019. Other Income for the year ended December 31, 2020 includes a gain of $89.4 million, compared to a gain of $20.1 million for the same period in 2019 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. Beginning in 2020, the Company changed its presentation of COLI income by presenting such income in Net Investment Income. Prior to the change, COLI income was presented in Other Income. Other Income for the year ended December 31, 2019 includes $7.8 million related to COLI income.
Net Realized Gains on Sales of Investments were $38.1 million in 2020, compared to $41.9 million in 2019. 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 were $19.5 million in 2020, compared to $13.8 million for the same period in 2019. 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.
Earned Premiums were $4,472.4 million in 2019, compared to $3,384.4 million in 2018, an increase of $1,088.0 million. Earned Premiums increased by $1,051.0 million, $19.6 million and $17.4 million in the Specialty Property & Casualty Insurance segment, Preferred Property & Casualty Insurance Segment and Life & Health Insurance segment, respectively. See MD&A, “Specialty Property & Casualty Insurance,” beginning on page 35, MD&A, “Preferred Property & Casualty Insurance,” beginning on page 40 and MD&A, “Life & Health Insurance,” beginning on page 46 for discussion of the changes in each segment’s earned premiums.
The number of ISO-classified catastrophic events and catastrophe losses and LAE, net of reinsurance recoveries, (excluding loss and LAE reserve development) by range of loss and business segment for the years ended December 31, 2020, 2019 and 2018 are presented below.
The Company primarily manages its exposure to catastrophes and other natural disasters through a combination of geographical diversification, restrictions on the amount and location of new business production in such regions, modifications of, and/or limitations to coverages and deductibles for certain perils in such regions and a catastrophe reinsurance program for the Company’s Specialty Property & Casualty Insurance and Preferred Property & Casualty Insurance segments. Coverage under the catastrophe reinsurance program is provided in various contracts and layers. The Company’s Specialty Property & Casualty Insurance and Preferred Property & Casualty Insurance segments also purchase reinsurance from the FHCF for hurricane losses in Florida at retentions lower than its catastrophe reinsurance program. The Life & Health Insurance segment also purchases reinsurance from the FHCF for hurricane losses in Florida and is party to the Property & Casualty catastrophe reinsurance program for its Kemper Home Service companies.
The following discussion of segment results uses the non-GAAP financial measures of (i) Underlying Losses and LAE and (ii) Underlying Combined Ratio. Underlying Losses and LAE (also referred to in the discussion as “Current Year Non-catastrophe Losses and LAE”) exclude the impact of catastrophe losses and loss and LAE reserve development from prior years from the Company’s Incurred Losses and LAE, which is the most directly comparable GAAP financial measure. The
Significant non-recurring items are excluded when (a) the nature of the charge or gain is such that it is reasonably unlikely to recur within two years, and (b) there has been no similar charge or gain within the prior two years. The most directly comparable GAAP financial measure is Income from Continuing Operations. There were no applicable significant non-recurring items that the Company excluded from the calculation of Adjusted Consolidated Net Operating Income for the years ended December 31, 2020, 2019 or 2018.
See MD&A, “Critical Accounting Estimates,” under the caption “Property and Casualty Insurance Reserves for Losses and Loss Adjustment Expenses” beginning on page 63 for additional information pertaining to the Company’s process of estimating property and casualty insurance reserves for losses and LAE, development of property and casualty insurance losses and LAE from prior accident years, also referred to as “reserve development” in the discussion of segment results, estimated variability of property and casualty insurance reserves for losses and LAE, and a discussion of some of the variables that may impact development of property and casualty insurance losses and LAE and the estimated variability of property and casualty insurance reserves for losses and LAE.
Other Income in the Specialty Property & Casualty Insurance segment decreased by $5.2 million in 2020, compared to 2019. 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 in 2019 includes the $3.8 million gain related to the agreement with Hagerty.
Insurance expenses were $651.9 million, or 19.5% of earned premiums, in 2020, a deterioration of 1.5% percentage points, compared to 2019. Excluding the impact of premium credits, insurance expenses were 19.0% of earned premium in 2020.
Earned Premiums in the Specialty Property & Casualty Insurance segment increased by $1,051.0 million in 2019, compared to 2018. Infinity accounted for $803.2 million of the increase in earned premiums, while higher volume and higher average earned premium accounted for the remaining increase. Both of the segment’s product lines had higher volume and higher average earned premium, although the overall impact on earned premiums was driven primarily by specialty personal automobile insurance.
Underlying losses and LAE as a percentage of earned premiums were 74.7% in 2019, an improvement of 0.2 percentage points, compared to 2018, due primarily to lower underlying losses as a percentage of earned premiums in commercial automobile insurance. Underlying losses and LAE exclude the impact of catastrophes and loss and LAE reserve development. Catastrophe losses and LAE (excluding reserve development) were $11.1 million in 2019, compared to $4.7 million in 2018, an increase of $6.4 million. Favorable loss and LAE reserve development (including catastrophe reserve development) was $34.6 million in 2019, compared to adverse development of $1.7 million in 2018.
As discussed in Note 3, “Acquisition of Business,” to the Consolidated Financial Statements, the Company completed its acquisition of Infinity on July 2, 2018. The results of Infinity’s operations have been included in the Company’s consolidated financial results from the date of its acquisition and forward.
Selected financial information for the specialty personal automobile insurance product line for the years ended December 31, 2020, 2019 and 2018 is presented below.
Earned Premiums on specialty personal automobile insurance increased by $936.1 million in 2019, compared to 2018. Infinity accounted for $701.2 million of the increase in earned premiums, while higher volume and higher average earned premium accounted for the remaining increase. Incurred losses and LAE were $2,117.6 million, or 74.9% of earned premiums, in 2019, compared to $1,427.6 million, or 75.6% of earned premiums, in 2018. Incurred losses and LAE as a percentage of earned premiums improved due primarily to favorable change in loss and LAE reserve development. Underlying losses and LAE as a percentage of related earned premiums were 75.4% in 2019, compared to 75.1% in 2018. Catastrophe losses and LAE (excluding reserve development) were $9.9 million in 2019, compared to $3.9 million in 2018. Favorable loss and LAE reserve development was $23.8 million in 2019, compared to adverse development of $5.5 million in 2018.
Selected financial information for the commercial automobile insurance product line is presented below.
Earned premiums in commercial automobile insurance increased by $51.2 million in 2020, compared to 2019, due primarily to higher volume, partially offset by premium credits of $3.6 million issued to policyholders during the second quarter of 2020. Incurred losses and LAE were $177.7 million, or 58.5% of earned premiums, in 2020, compared to $161.3 million, or 63.8% of earned premiums, in 2019. Incurred losses and LAE as a percentage of earned premiums improved due primarily to an improvement in underlying losses and LAE as a percentage of earned premiums. Underlying losses and LAE as a percentage of earned premiums were 62.5% in 2020, compared to 67.6% in 2019, an improvement of 5.1 percentage points due primarily to improvements in claim frequency. Favorable loss and LAE reserve development was $12.9 million in 2020, compared to $10.8 million in 2019.
Earned premiums in commercial automobile insurance increased by $114.9 million in 2019, compared to 2018. Infinity accounted for $101.8 million of the increase in earned premiums, while higher volume and higher average earned premium accounted for the remaining portion. Incurred losses and LAE were $161.3 million, or 63.8% of earned premiums, in 2019, compared to $96.2 million, or 69.8% of earned premiums, in 2018. Incurred losses and LAE as a percentage of earned premiums improved due primarily to lower underlying losses and LAE as a percentage of earned premiums as well as higher levels of favorable loss and LAE reserve development. Underlying losses and LAE as a percentage of earned premiums were 67.6% in 2019, compared to 72.0% in 2018, an improvement of 4.4 percentage points due primarily to lower frequency of claims in 2019 relative to the prior year. Favorable loss and LAE reserve development was $10.8 million in 2019, compared to $3.8 million in 2018.
Earned Premiums in the Preferred Property & Casualty Insurance segment decreased by $62.1 million in 2020, compared to 2019, due primarily to lower volume and the impact of premium credits of $12.7 million issued to automobile policyholders
during the second quarter of 2020. All lines experienced an overall decline in volume, although the overall impact was driven primarily by preferred personal automobile insurance.
Net Investment Income in the Preferred Property & Casualty Insurance segment decreased by $6.4 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 higher rate of return on Alternative Investments.
The Preferred 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 Preferred Property & Casualty Insurance segment reported Segment Net Operating Income of $41.9 million for the year ended December 31, 2019, compared to Segment Net Operating Loss of $25.7 million in 2018. Segment Net Operating Income improved by $16.2 million due primarily to lower incurred catastrophe losses and LAE (excluding loss and LAE reserve development) and favorable prior year loss and LAE development (including a recovery on prior year catastrophes) partially offset by higher underlying losses and LAE as a percentage of earned premiums and lower net investment income.
Earned Premiums in the Preferred Property & Casualty Insurance segment increased by $19.6 million in 2019, compared to 2018, due primarily to higher average earned premium in Preferred Automobile Insurance and Other Personal Insurance partially offset a decrease in volume for Preferred Automobile, Homeowners, and Other Insurance.
Underlying losses and LAE as a percentage of earned premiums were 64.2% and 62.9% in 2019 and 2018. Underlying losses and LAE exclude the impact of catastrophe and loss and LAE reserve development. Catastrophe losses and LAE (excluding reserve development) were $63.0 million in 2019, compared to $87.3 million in 2018, which is a decrease of $24.3 million due primarily to fewer catastrophic events in the greater than $25 million per event range in 2019, compared to 2018, and lower severity of other catastrophic events in 2019, compared to 2018. Favorable loss and LAE reserve development (including catastrophe reserve development) was $36.0 million in 2019, compared to $8.3 million in 2018. 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 $233.3 million, or 31.1% of earned premiums, in 2019, a deterioration of 0.2 percentage points compared to 2018.
Selected financial information for the preferred personal automobile insurance product line is presented below.
Earned premiums in other personal insurance decreased by $1.6 million in 2019, compared to 2018, primarily due to a decrease in volume. Incurred losses and LAE were $10.8 million, or 27.8% of earned premiums, in 2019, compared to $18.3 million, or 45.3% of earned premiums, in 2018. Incurred losses and LAE as a percentage of earned premiums increased due primarily to higher favorable loss and LAE reserve development in 2019 compared to 2018. Underlying losses and LAE as a percentage of earned premiums were 45.6% in 2019, compared to 47.3% in 2018, an improvement of 1.7 percentage points. Catastrophe losses and LAE (excluding reserve development) were $1.2 million in 2019, compared to $4.9 million in 2018. Favorable loss and LAE reserve development was $8.1 million in 2019, compared to $5.7 million in 2018.
In the third quarter of 2016, the Company’s Life & Health segment voluntarily began implementing a comprehensive process under which it cross-references its life insurance policies against the Death Master File and other death verification databases to identify potential situations where the beneficiaries may not have filed a claim following the death of an insured and initiate 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 pre-tax charge of $77.8 million to recognize the initial impact of using death verification databases in the Company’s operations, including to determine its IBNR liability for unpaid claims and claims adjustment expenses for life insurance products. Subsequently, the Company has reduced its estimate of the initial impact of using death verification databases by $30.3 million, of which $9.3 million was recognized during 2020 and $21.0 million was recognized during 2019.
Earned Premiums in the Life & Health Insurance segment increased by $5.0 million for the year ended December 31, 2020, compared to 2019, due primarily to higher persistency on life insurance products, higher volume on accident and health insurance products and a reduction in the estimated return premium reserve for insurance products subject to minimum loss ratio (“MLR”), partially offset by lower property insurance earned premiums due primarily to a lower volume of insurance sold.
Insurance Expenses in the Life & Health Insurance segment increased by $0.9 million in 2020, compared to 2019.
Segment Net Operating Income in the Life & Health Insurance segment was $60.0 million for the year ended December 31, 2020, compared to $98.7 million in 2019.
Net Investment Income decreased by $4.5 million in 2019, compared to 2018, due primarily to lower investment yields on fixed income securities and a lower rate of return from alternative investments, partially offset by a higher investment base. The weighted-average book yield on the Company’s life and health insurance subsidiaries’ investments in fixed maturities was approximately 5.1% and 5.3% at December 31, 2019 and 2018, respectively.
Earned premiums from property insurance decreased by $4.5 million in 2020, compared to 2019, due primarily to a lower volume of insurance sold. Incurred losses and LAE on property insurance were $28.5 million, or 44.7% of earned premiums, in 2020, compared to $22.8 million, or 33.4% of earned premiums, in 2019. Current year non-catastrophe losses and LAE on property insurance were $15.2 million, or 23.8% of property insurance earned premiums, in 2020, compared to $18.1 million, or 26.5% of property insurance earned premiums, in 2019, a decrease of 2.7 percentage points due primarily to lower frequency of claims. Catastrophe losses and LAE (excluding loss reserve development) were $12.4 million in 2020, compared to $3.1 million in 2019, an increase of $9.3 million due primarily to a higher frequency of claims and severity of losses in connection with catastrophic events. Adverse loss and LAE reserve development was $0.9 million in 2020, compared to $1.6 million in 2019. Insurance expenses decreased $5.8 million in 2020, compared to 2019, due primarily to lower volume of policies issued.
Earned premiums on property insurance decreased by $2.2 million in 2019, compared to 2018, due primarily to a lower volume of insurance sold. Incurred losses and LAE on property insurance were $22.8 million, or 33.4% of property insurance earned premiums, in 2019, compared to $25.9 million, or 36.8% of property insurance earned premiums, in 2018. Current year non-catastrophe losses and LAE on property insurance were $18.1 million, or 26.5% of property insurance earned premiums, in 2019, compared to $20.5 million, or 29.2% of property insurance earned premiums, in 2018, a decrease of 2.7 percentage points due to lower frequency of claims. Catastrophe losses and LAE (excluding development) were $3.1 million in 2019, compared to $4.0 million in 2018, due primarily to a lower frequency of claims and severity of losses in connection with catastrophic events. Adverse loss and LAE reserve development was $1.6 million in 2019, compared to $1.4 million in 2018. Insurance expenses decreased $1.2 million in 2019, compared to 2018, due primarily to lower volume of policies issued.
Net Investment Income decreased by $16.1 million for the year ended December 31, 2020, compared to 2019, due primarily to lower yields on fixed income securities, lower dividend income on equity securities and higher investment expenses partially offset by higher return from Alternative Investments and higher invested assets in fixed income securities.
Net Investment Income increased by $23.4 million for the year ended December 31, 2019, compared to 2018, due primarily to the inclusion of the Infinity investment portfolio for the entire year in 2019 versus only six months in 2018, partially offset by a lower rate of return from Alternative Investments.
Income (Loss) From Change in Fair Value of Equity and Convertible Securities
Net Realized Gains on Sales of Fixed Maturities for the year ended December 31, 2020 primarily relate to a repositioning of the portfolio for duration extension purposes.
During the fourth quarter of 2019, the Company began repositioning the fixed maturity investment portfolio in in its Life and Health Insurance segment and recognized Realized Gains on Sales of Fixed Maturities of $13.3 million and Realized Losses on Sales of Fixed Maturities of $4.4 million in connection with the repositioning.
Net Realized Gains on Sales of Equity Securities for the year ended December 31, 2018 primarily relate to gains on dispositions of certain Investments in Equity Securities at Modified Cost resulting from transactions whereby the Company’s investments were acquired by other companies.
The Company’s fixed maturity investment portfolio is comprised primarily of corporate, high-grade municipal and agency bonds. At December 31, 2020, approximately 94% of the Company’s fixed maturity investment portfolio was rated investment-grade, which the Company defines as a security issued by a high quality obligor with at least a relatively stable credit profile and where it is highly likely that all contractual payments of principal and interest will timely occur and carry a rating from the NAIC of 1 or 2. Securities with a rating of 1 or 2 from the NAIC typically are rated by one of more Nationally Recognized Statistical Rating Organizations and either have a rating of AAA, AA, A or BBB from S&P; a rating of Aaa, Aa, A or Baa from Moody’s; or a rating of AAA, AA, A or BBB from Fitch.
Gross unrealized losses on the Company’s investments in below-investment-grade fixed maturities were $23.7 million and $11.7 million at December 31, 2020 and 2019, respectively.
The following table summarizes the fair value of the Company’s investments in governmental fixed maturities at December 31, 2020 and 2019.
The Company’s short-term investments primarily consist of U.S. treasury bills, money market funds and overnight interest bearing accounts. At December 31, 2020, the Company had $620.5 million invested in U.S. treasury bills, $242.1 million invested in money market funds which primarily invest in U.S. Treasury securities and $4.3 million invested in overnight interest bearing accounts with one of the Company’s custodial banks.
The following table summarizes the fair value of the Company’s ten largest investment exposures, excluding investments in U.S. Government and Government Agencies and Authorities and Short-term Investments, at December 31, 2020.
Expenses for the year ended December 31, 2020, 2019 and 2018 were:
Other Expenses increased by $114.2 million for the year ended December 31, 2020, compared to 2019, due primarily to Pension Settlement Expenses related to purchasing annuities on behalf of certain plan participants and lump-sum payments made to certain terminated vested participants and higher Acquisition Related Transaction, Integration and Other Costs. Other Expenses increased by $5.7 million for the year ended December 31, 2019, compared to 2018, due primarily to higher employee compensation, bonuses and legal fees, partially offset by a reduction in costs associated with the acquisition of Infinity and the related transaction and integration cost.
Tax-exempt investment income and dividends received deductions were $19.0 million, $20.4 million and $22.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. The nontaxable increase in cash surrender value on COLI was $12.9 million, $7.6 million and $3.8 million for the years ended December 31, 2020, 2019 and 2018, respectively. The Company realized net investment tax credits of $3.2 million for the year ended December 31, 2020. The amount of expense recognized for long-term equity-based compensation expense under U.S. GAAP was $10.5 million, $21.0 million, and $6.7 million lower than the amount that would be deductible under the Internal Revenue Code (the “IRC”) for the years ended December 31, 2020, 2019 and 2018, respectively. The amount of nondeductible executive compensation was $13.0 million, $11.9 million, and $6.7 million for years ended December 31, 2020, 2019 and 2018, respectively. The tax benefit recorded pursuant to the Tax Act was $26.4 million for the year ended December 31, 2018. See Note 16, “Income Taxes,” to the Consolidated Financial Statements for additional discussion of income taxes.
During 2020, 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. United Insurance had outstanding advances from the FHLB of Chicago totaling $407.8 million at December 31, 2020. These advances were made in connection with the Company’s spread lending program. The proceeds related to these advances were used to purchase fixed maturity securities to earn incremental net investment income. With respect to these advances, United Insurance held pledged securities in a custodial account with the FHLB of Chicago with a fair value of $530.5 million at December 31, 2020. The fair value of the collateral pledged must be maintained at certain specified levels above the borrowed amount, which can vary depending on the assets pledged. If the fair value of the collateral declines below these specified levels of the amount borrowed, United Insurance would be required to pledge additional collateral or repay outstanding borrowings. See Note 7, “Policyholder Obligations,” to the Consolidated Financial Statements for additional information about the United Insurance advances and related funding agreements.
Kemper paid a quarterly dividend of $0.30 per common share for each quarter of 2020 and $0.25 per common share for the first three quarters of 2019 and $0.28 for the fourth quarter of 2019, respectively. Dividends and dividend equivalents paid were $78.9 million and $67.8 million for the years ended December 31, 2020 and 2019, respectively.
Kemper directly held cash and investments totaling $733.2 million at December 31, 2020, compared to $206.8 million at December 31, 2019.
The primary sources of funds available for repayment of Kemper’s indebtedness, repurchases of common stock, future shareholder dividend payments and the payment of interest on Kemper’s senior notes and term loan, include cash and investments directly held by Kemper, receipt of dividends from Kemper’s insurance subsidiaries and borrowings under the credit agreement and from subsidiaries.
The primary sources of funds for Kemper’s insurance subsidiaries are premiums, investment income, proceeds from the sales and maturity of investments, advances from the FHLBs of Chicago, Dallas and San Francisco, and capital contributions from Kemper. The primary uses of funds are the payment of policyholder benefits under life insurance contracts, claims under property and casualty insurance contracts and accident and health insurance contracts, the payment of commissions and general expenses, the purchase of investments and repayments of advances from the FHLBs of Chicago, Dallas and San Francisco.
Net Cash Used by Investing Activities was $633.4 million for the year ended December 31, 2019, compared to $497.6 million in 2018. Net cash provided by dispositions of short-term investments was $176.0 million for the year ended December 31, 2019, compared to $52.7 million in 2018. Fixed Maturities investing activities provided net cash of $55.8 million for the year ended December 31, 2019, compared to net cash used of $230.1 million in 2018. Equity Securities investing activities used net cash of $89.7 million for the year ended December 31, 2019, compared to $126.6 million in 2018. Equity Method Limited Liability Investments investing activities used net cash of $44.2 million for the year ended December 31, 2019, compared to providing net cash of $29.0 million in 2018.
The fair value of the Company’s investments measured and reported at fair value was $8,504.3 million at December 31, 2020, of which $7,762.9 million, or 91%, were investments that were based on quoted market prices or significant value drivers that are observable, $449.2 million, or 5%, were investments where at least one significant value driver was unobservable and $292.2 million or 3% were investments for which fair value is measured using the net asset value per share practical expedient. Fair value measurements based on readily available, active, quoted market prices or for which fair value can be measured from actively quoted prices generally are deemed to have a higher degree of market price observability and a lesser degree of judgment, compared to fair value measurements based on significant unobservable inputs used in measuring fair value. The prices that the Company might realize from actual sales of investments are likely to vary from their respective estimated fair values at December 31, 2020 due to changing market conditions and limitations inherent in the estimation process.
The classification of a company’s investment in a financial instrument may affect its reported results. Under GAAP, a company may elect to use the fair value option method of accounting for some or all of its investments in financial instruments. Under the fair value option method of accounting, a company is required to recognize changes in fair values into income for the period reported. The Company has elected the fair value option for investments in fixed maturities with equity conversion features which are recorded on the Consolidated Balance Sheets as Convertible Securities. Accordingly, both the reported and fair values of the Company’s investments in Convertible Securities accounted for under the fair value option method of accounting were $39.9 million at December 31, 2020. For investments in fixed maturities classified as held to maturity, a company is required to carry the investment at amortized cost, with only amortization occurring during the period recognized into income. None of the Company’s investments in fixed maturities were classified as held to maturity at December 31, 2020. Changes in the fair value of investments in fixed maturities classified as available for sale are not recognized in income during the period, but rather are recognized as a separate component of Accumulated Other Comprehensive Income (“AOCI”) until realized. Both the reported and fair values of the Company’s investments in fixed maturities classified as available for sale were $7,605.9 million at December 31, 2020.
Equity securities with readily determinable fair values are recorded as Equity Securities at Fair Value with changes in fair values recognized into income for the period reported. Accordingly, both the reported and fair values of the Company’s investments in Equity Securities at Fair Value were $858.5 million at December 31, 2020. 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 identical or similar investments from the same issuer. Changes in the carrying value of Equity Securities at Modified Cost due to observable price changes are recorded into income for the period reported.
The Company’s portfolio also includes investments in Alternative Energy Partnerships that are accounted for under the Hypothetical Liquidation at Book Value (“HLBV”) method. Under the HLBV method, the amounts of income and loss attributed to investors reflect changes in the amounts the fund investors would hypothetically receive at each balance sheet date under the liquidation provisions of the contractual agreements of these funds. Attributing income and loss under the HLBV method requires the use of significant assumptions and forecasts to calculate the amounts that fund investors would receive upon a hypothetical liquidation. See Note 2 “Summary of Accounting Policies and Accounting Changes,” to the Consolidated Financial Statements for additional information.
The Company regularly reviews its fixed maturity investment portfolio and holdings in Equity Securities at Modified Cost for factors that may indicate a decline in the fair value of an investment below its cost, amortized cost or modified cost basis.
Changes in these factors from their December 31, 2020 evaluation date could result in the Company determining that a decline in the fair value exists for an investment held and evaluated at December 31, 2020. Such determination would result in an impairment loss in the period such determination is made.
The Company’s Property and Casualty Insurance Reserves are reported using the Company’s estimate of its ultimate liability for losses and LAE for claims that occurred prior to the end of any given accounting period but have not yet been paid. The Company had $1,982.5 million and $1,969.8 million of gross loss and LAE reserves at December 31, 2020 and 2019, respectively.
Property and Casualty Insurance Reserves for the Company’s business segments at December 31, 2020 and 2019 were:
In estimating the Company’s Property and Casualty Insurance Reserves, the Company’s actuaries exercise professional judgment and must consider, and are influenced by, many variables that are difficult to quantify. Accordingly, the process of estimating and establishing the Company’s Property and Casualty Insurance Reserves is inherently uncertain, and the actual ultimate cost of known and unknown claims may vary materially from the estimated amounts reserved.
The Company’s actuaries estimate 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 product line and/or coverage level or emerging issues relating to them. The Company’s actuaries use a variety of generally accepted actuarial loss reserving estimation methodologies, including, but not limited to, the following:
The key assumption in these estimation methodologies is that patterns observed in prior periods are indicative of how losses and LAE are expected to develop in the future and that such historical data can be used to predict and estimate ultimate losses and LAE. However, changes in the Company’s business processes, by their very nature, are likely to affect the development patterns, which means the Company’s actuaries must routinely make assumptions about how changes in business practices would affect historical patterns.
The ultimate impact of a single change in a business process is difficult to quantify and detect, and even more difficult if several changes to business processes occur over several years. Initially after a change is implemented, there are fewer data points, as compared to the historical data, for the Company’s actuaries to analyze. With fewer data points to analyze, the Company’s actuaries cannot be certain that observed differences from the historical data trends are a result of the change in business process or merely a random fluctuation in the data. As the Company’s actuaries observe more data points following the change in business process, the Company’s actuaries can gain more confidence in whether the change in business process is affecting the development pattern. The challenge for the Company’s actuaries is how much weight to place on the development patterns based on the older historical data and how much weight to place on the development patterns based on more recent data.
For each accident quarter or year, the point estimate selected by the Company’s actuaries is not necessarily one of the points produced by any particular one of the methodologies utilized, but often is another point selected by the Company’s actuaries, using their professional judgment, that takes into consideration each of the points produced by the several loss reserving estimation methodologies used. In some cases, for a particular product, the current accident quarter or year may not have enough paid claims data to rely upon, leading the Company’s actuaries to conclude that the incurred loss development methodology provides a better estimate than the paid loss development methodology. Therefore, the Company’s actuaries may give more weight to the incurred loss development methodology for that particular accident quarter or year. As an accident quarter or year ages for that same product, the actuary may gain more confidence in the paid loss development methodology and begin to give more weight to the paid loss development methodology. The Company’s actuaries’ quarterly selections are summed by product and/or coverage levels to create the actuarial indication of the ultimate losses. More often than not, the actuarial indication for a particular product line and accident quarter or year is most heavily weighted toward the incurred loss development methodology, particularly for short-tail lines such as personal automobile insurance. Historically, the incurred loss development methodology has been more reliable in predicting ultimate losses for short-tail lines, especially in the more recent accident quarters or years, compared with the paid loss development methodology. However, in some circumstances changes can occur which impact numerous variables, including, but not limited to, those variables identified below that are difficult to quantify and/or impact the predictive value of prior development patterns relied upon in the incurred loss development methodology and paid loss development methodology. In those circumstances, the Company’s actuaries must make adjustments to these loss reserving estimation methodologies or use additional generally accepted actuarial estimation methodologies. In those circumstances, the Company’s actuaries, using their professional judgment, may place more weight on the adjusted loss reserving estimation methodologies or other generally accepted actuarial estimation methodologies until the newer development patterns fully emerge and the Company’s actuaries can fully rely on the unadjusted loss reserving estimation methodologies. In the event of a wide variation among results generated by the different projection methodologies, the Company’s actuaries further analyze the data using additional techniques.
•Changes in the level of minimum case reserves, and the automatic aging of those minimum case reserves;
•Changes to claims practices, including, but not limited to, changes in the reporting and impact of large losses, timing of reported claims, changes in claims closing and re-opening patterns, adequacy of case reserves, implementation of new systems for handling claims, turnover of claims department staffs, timing and depth of the audit review of claims handling procedures;
•Medical costs, including, but not limited to, the ability to assess the extent of injuries and the impact of inflation;
believes that one standard deviation of variability is a reasonably likely scenario to measure variability for its loss and LAE reserves for specialty personal automobile insurance. The Company estimates that the Company’s specialty personal automobile insurance loss and LAE reserves could have varied by $84.6 million in either direction at December 31, 2020 for all accident years combined under this scenario. In addition to the factors described above, other factors may also impact loss reserve development in future periods. These factors include governmental actions, including court decisions interpreting existing laws, regulations or policy provisions, developments related to insurance policy claims and coverage issues, adverse or favorable outcomes in pending claims litigation, the number and severity of insurance claims, the impact of inflation on insurance claims and the impact of required participation in windpools and joint underwriting associations and residual market assessments. Although the Company’s actuaries do not make specific numerical assumptions about these factors, changes in these factors from past patterns will impact historical loss development factors and, in turn, future loss reserve development. Significant favorable changes in one or more factors will lead to favorable future loss reserve development, which could result in the actual loss developing closer to, or even below, the lower end of the Company’s estimated reserve variability. Significant unfavorable changes in one or more factors will lead to unfavorable loss reserve development, which could result in the actual loss developing closer to, or even above, the higher end of the Company’s estimated reserve variability. Accordingly, due to these factors and the other factors enumerated throughout the MD&A and the inherent limitations of the loss reserving estimation methodologies, the estimated and illustrated reserve variability may not necessarily be indicative of the Company’s future reserve variability, which could ultimately be greater than the estimated and illustrated variability. In addition, as previously noted, development will emerge in all of the Company’s product lines over time. Accordingly, the Company’s future reserve variability could ultimately be greater than the illustrated variability. Additional information pertaining to the estimation of, and development of, the Company’s Property and Casualty Insurance Reserves is contained in Item 1 of Part I of this 2020 Annual Report under the heading “Property and Casualty Loss and Loss Adjustment Expense Reserves.”
Note 13-Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income 110
The Consolidated Financial Statements included the accounts of Kemper Corporation (“Kemper”) and its subsidiaries which include property and casualty and life and health subsidiaries (collectively referred to herein as the “Company”). The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). All significant intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity 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. Many of these estimates and assumptions are common in the insurance and financial services industries; others are specific to the Company’s business and operations. Actual results could differ materially from those estimates and assumptions.
The process of estimating and establishing reserves for losses and loss adjustment expenses ("LAE") for property and casualty insurance is inherently uncertain, and the actual ultimate net cost of known and unknown claims may vary materially from the estimated amounts reserved. The reserving process is particularly imprecise for claims involving long-tailed exposures, which may not be discovered or reported until years after the insurance policy period has ended. Management considers a variety of factors, including, but not limited to, past claims experience, current claim trends and relevant legal, economic and social conditions, in estimating reserves. A change in any one or more factors is likely to result in the ultimate net claim costs differing from the estimated reserve. Changes in such estimates may be material and would be recognized in the Consolidated Financial Statements when such estimates change.
Investments in Alternative Energy Partnerships are measured using the Hypothetical Liquidation at Book Value (“HLBV”) method of equity method accounting whereby changes in the estimated amount the Company would receive upon the liquidation and distribution of the equity investment’s net assets, are recorded in Net Investment Income. Tax credits allocated from investments in Alternative Energy Partnerships are recognized using the flow-through method, where credits are recorded as a reduction to income tax expense in the period earned. Differences in the basis calculated under tax law and U.S. GAAP are recognized using the income statement approach, where basis differences are recorded to Income Tax Expense immediately, rather than deferred as adjustments to the carrying value of the asset. Certain partnerships for which results are not available on a timely basis are reported on a lag.
Other Investments primarily include COLI, loans to policyholders, real estate and mortgage loans. COLI is reported at cash surrender value with changes due to cost of insurance and investment experience reported in Net Investment Income in the Consolidated Statements of Income. Loans to policyholders are carried at unpaid principal balance. Real estate is carried at cost, net of accumulated depreciation. Real estate is depreciated over the estimated useful life of the asset using the straight-line method of depreciation. Real estate is evaluated for impairment when events or circumstances indicate the carrying value may not be recoverable. An impairment loss on real estate is recognized when the carrying value exceeds the sum of undiscounted projected future cash flows as well as the fair value, or, in the case of a property classified as held for sale, when the carrying value exceeds the fair value, net of costs to sell. Mortgage loans are carried at amortized cost, net of a reserve for expected credit losses.
to make contractual cash flows, (4) defaults or other collectability concerns related to the issuer, (5) changes in the ratings assigned by a rating agency and (6) other credit enhancements that affect the investment’s expected performance.
The Company reports accrued investment income separately for available-for-sale fixed maturity securities and has elected not to measure an allowance for credit losses on accrued investment income. Accrued investment income is written off through impairment losses at the time the issuer of the bond defaults or is expected to default on interest payments.
•Level 1 - Quoted prices in an active market for identical assets or liabilities;
•Level 2 - Observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and
The cost of an acquired entity over the fair value of net assets acquired is reported as Goodwill. Goodwill is not amortized, but rather is tested for recoverability annually or when certain triggering events require testing.
claims. These estimates are adjusted in the aggregate for ultimate loss expectations based on historical experience patterns and current economic trends, with any change in the estimated ultimate liabilities being reported in the Consolidated Statements of Income in the period of change. Changes in such estimates may be material.
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 below.
The allowance for credit losses is a valuation account that is deducted from the receivables from policyholders based on the net amount expected to be collected on the insurance contract. Receivables from policyholders are charged off against the allowance when management believes the uncollectability of the receivable is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Accrued Expenses and Other Liabilities primarily include drafts payable, accrued salaries and commissions, pension benefits, postretirement medical benefits, lease liability and accrued taxes, licenses and fees.
Property and casualty insurance and short duration health insurance premiums are deferred when written and recognized and earned ratably over the periods to which the premiums relate. Unearned Premiums represent the portion of the premiums written related to the unexpired portion of policies in force which has been deferred and is reported as a liability. The Company performs a premium deficiency analysis typically at a segment level, namely Specialty Property & Casualty Insurance and Preferred Property & Casualty Insurance, which is consistent with the manner in which the Company acquires and services policies and measures profitability. Anticipated investment income is excluded from such analysis. A premium deficiency is recognized when the sum of expected claim costs, claim adjustment expenses, unamortized deferred policy acquisition costs and maintenance costs exceeds the related unearned premiums by first reducing related deferred policy acquisition costs to an amount, but not below zero, at which the premium deficiency would not exist. If a premium deficiency remains after first reducing deferred policy acquisition costs, a premium deficiency reserve is established and reported as a liability in the Company’s financial statements.
In the normal course of business, Kemper’s insurance subsidiaries reinsure certain risks above certain retention levels with other insurance enterprises. These reinsurance agreements do not relieve Kemper’s insurance subsidiaries of their legal obligations to the policyholder. Amounts recoverable from reinsurers are included in Other Receivables.
Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance, if any, is maintained for the portion of deferred income tax assets that the Company does not expect to recover. Increases, if any, in the valuation allowance for deferred income tax assets are recognized as income tax expense. Decreases, if any, in the valuation allowance for deferred income tax assets are generally recognized as income tax benefit. The effect on deferred income tax assets and liabilities of a change in tax law including a change in tax rates is recognized in income from continuing operations in the period in which the change is enacted.
In 2008, the Company sold its Unitrin Business Insurance operations and retained certain liabilities for unpaid insured losses that occurred prior to the date of the sale. Changes in the Company’s estimate of such retained liabilities after the sale were reported in Income from Discontinued Operations in 2018. In 2020, any remaining changes in the Company’s estimate of such retained liabilities were reported in Income from Continuing Operations.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the existing incurred loss impairment model with an expected credit loss impairment model. The expected credit loss impairment model requires the entity to recognize its estimate of expected credit losses for affected financial assets using an allowance for credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected. The income statement includes the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have occurred during the period. Credit losses on available-for-sale debt securities are measured in a manner similar to prior GAAP, although ASU 2016-13 requires that they be presented as an allowance rather than as a write-down of the amortized cost. In situations where the estimate of credit loss on an available-for-sale debt security declines, entities will be able to record a reversal of the allowance to income in the current period, which was prohibited prior to the adoption of ASU 2016-13. ASU 2016-13 was adopted using the modified retrospective method for financial assets measured at amortized cost as well as receivables from policyholders. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance. A prospective transition approach is required for available-for-sale fixed maturity securities that have recognized an other-than-temporary impairment write-down prior to the effective date. The Company adopted the guidance effective January 1, 2020, which resulted in no cumulative-effect adjustment to retained earnings.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350). To simplify the subsequent measurement of goodwill, ASU 2017-04 eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity previously had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity performs its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized is limited to the total amount of goodwill allocated to that reporting unit. Additionally, ASU 2017-04 eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. ASU 2017-04 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The adoption of ASU 2017-04 did not have a material effect on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
In May 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief. ASU 2019-05 provides transition relief for entities adopting the credit loss standard, ASU 2016-13. Specifically, ASU 2019-05 amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for financial instruments that are: (i) within the scope of the credit loss guidance in Accounting Standards Codification (“ASC”) Topic 326, Financial Instruments-Credit Losses; (ii) were previously recorded at amortized cost; (iii) are eligible for the fair value option under ASC Topic 825, Financial Instruments; and (iv) are not held to maturity debt. ASU 2019-05 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The Company did not elect the fair value option upon adoption of ASU 2016-13 for the financial instruments outlined above.
On November 23, 2020, Kemper announced that it entered into a definitive agreement to acquire American Access Casualty Company and its related captive insurance agency, Newins Insurance Agency Holdings, LLC, and its subsidiaries (collectively “AAC”), in a cash transaction valued at $370.0 million. The transaction is expected to close in the first quarter of 2021, subject to regulatory approval and other customary closing conditions.
On July 2, 2018, Kemper acquired 100% of the outstanding common stock of Infinity Property and Casualty Corporation (“Infinity”), pursuant to the terms of the merger agreement dated February 13, 2018, with total cash, stock and equity-based compensation consideration paid to Infinity shareholders of approximately $1.5 billion. In conjunction with closing the acquisition, Kemper issued 13.2 million shares, with an aggregate fair value of $982.5 million based on Kemper’s July 2, 2018 stock price of $74.53 per share, and paid $564.6 million in cash consideration to Infinity’s shareholders. In addition, Kemper issued 44,010 restricted stock units under Kemper’s equity-based compensation plan to replace Infinity restricted shares that were outstanding immediately prior to the closing. The aggregate fair value of such Kemper restricted stock units granted was $3.3 million at July 2, 2018, of which $1.6 million is attributed to service provided prior to the closing and included in consideration paid. The remaining amount of $1.7 million is attributed to future service and will be recognized in compensation expense primarily over a period of two years. The cash consideration was funded by cash on hand as of July 2, 2018, inclusive of $250.0 million in borrowings under the Company’s delayed draw term loan facility and $110.0 million of Kemper subsidiary borrowings from the FHLB of Dallas and FHLB of Chicago. On July 13, 2018, Kemper subsidiaries repaid in full the $110.0 million of FHLB borrowings, plus accrued interest. On December 28, 2018, Kemper repaid $215.0 million of the delayed draw term loan facility. See Note 8, “Debt,” to the Consolidated Financial Statements for additional information. Infinity is a national provider of auto insurance focused on serving the specialty automobile market.
Other Receivables included $5.1 million and $1.0 million of unsettled sales of Investments in Fixed Maturities at December 31, 2020 and December 31, 2019, respectively. Accrued Expenses and Other Liabilities included unsettled purchases of Investments in Fixed Maturities of $4.3 million and $19.5 million at December 31, 2020 and 2019, respectively.
The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at December 31, 2020 by contractual maturity were:
Investments in Mortgage- and Asset-backed Securities Not Due at a Single Maturity Date at December 31, 2020 consisted of securities issued by the Government National Mortgage Association with a fair value of $413.8 million, securities issued by the Federal National Mortgage Association with a fair value of $5.2 million, securities issued by the Federal Home Loan Mortgage Corporation with a fair value of $12.0 million and securities of other non-governmental issuers with a fair value of $993.0 million.
An aging of unrealized losses on the Company’s Investments in Fixed Maturities at December 31, 2020 is presented below.
At December 31, 2020, the Company did not have the intent to sell these investments, and it was not more likely than not that the Company would be required to sell these investments before an anticipated recovery of value. The Company evaluated these investments for credit losses at December 31, 2020. The Company considers many factors in evaluating whether the unrealized losses were credit related including, but not limited to, the extent to which the fair value has been less than amortized cost, conditions related to the security, industry, or geographic area, payment structure of the investment and the likelihood of the issuer’s ability to make contractual cash flows, defaults or other collectability concerns related to the issuer, changes in the ratings assigned by a rating agency, and other credit enhancements that affect the investment’s expected performance. The Company determined that the unrealized losses on these securities were due to non-credit related factors at the evaluation date.
Investment-grade fixed maturity investments comprised $9.1 million and below-investment-grade fixed maturity investments comprised $11.7 million of the unrealized losses on investments in fixed maturities at December 31, 2019. For below-investment-grade fixed maturity investments in an unrealized loss position, the unrealized loss amount, on average, was less than 5% of the amortized cost basis of the investment.
There were $0.3 million unrealized losses at December 31, 2019 related to securities for which the Company has recognized credit losses in earnings in the preceding table under the heading “Less Than 12 Months.” There were no unrealized losses at December 31, 2019 related to securities for which the Company has recognized credit losses in earnings in the preceding table under the heading “12 Months or Longer.”
For Equity Securities at Modified Cost, the Company performs a qualitative impairment analysis on a quarterly basis consisting of various factors such as earnings performance, current market conditions, changes in credit ratings, changes in the regulatory environment and other factors. If the qualitative analysis identifies the presence of impairment indicators, the Company estimates the fair value of the investment. If the estimated fair value is below the carrying value, the Company records an impairment in the Consolidated Statement of Income to reduce the carrying value to the estimated fair value. When the Company identifies observable transactions of the same or similar securities to those held by the Company, the Company increases or decreases the carrying value to the observable transaction price. The Company recognized a decrease of $0.5 million in the carrying value due to observable transactions for the year ended December 31, 2020. The Company recognized an impairment of $2.9 million on Equity Securities at Modified Cost for the year ended December 31, 2020 as a result of the Company’s qualitative impairment analysis. The Company has recognized no cumulative increases in the carrying value due to
observable transactions, no cumulative decreases in the carrying value due to observable transactions and $5.8 million of cumulative impairments on Equity Securities at Modified Cost held as of December 31, 2020.
Goodwill balances by business segment at December 31, 2020 and 2019 were:
The Company tests goodwill for recoverability at the reporting unit level on an annual basis, or whenever events or circumstances indicate the fair value of a reporting unit may have declined below its carrying value. The Company performed a qualitative goodwill impairment assessment for all reporting units with goodwill as of October 1, 2020. The qualitative assessment takes into consideration changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy, events impacting reporting units, and changes in Kemper’s stock price since the last quantitative assessment, which was performed on January 1, 2017. Based on its qualitative assessment, the Company concluded that the associated goodwill was recoverable for each reporting unit tested.
The Gross carrying amount and accumulated amortization of Definite and Indefinite life intangible assets at December 31, 2020 and 2019 were:
The determination of individual case reserves differs by line of business. For personal automobile insurance and commercial automobile insurance, case reserves are set primarily using statistical reserves that are based on studies of historical average paid amounts by state, coverage and product. However, when such reserves exceed certain thresholds they are set manually by adjusters. For preferred homeowners insurance and other personal insurance, case reserves are set by adjusters and are based on the adjusters’ estimates of the amount for which the claims will ultimately be paid.
The Company’s actuaries’ quarterly or yearly selections are summed by product and/or coverage levels to create the actuarial indication of the ultimate losses and LAE. Paid amounts are then subtracted from the ultimates to compute the reserves for property and casualty insurance losses and LAE. These results are reviewed by the Company’s 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 year, pertinent trends observed over the recent past, the level of volatility within a particular line of business, the improvement or deterioration of actuarial indications in the current period as compared to prior periods, and the amount of reserves related to third party pools for which the Company has limited access to the underlying data and, accordingly, relies on calculations provided by such pools. The 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 developed. Changes in the Company’s estimates of these losses and LAE over time, also referred to as “development,” will occur and may be material.
The claim counts in the preceding tables are cumulative reported claim counts as of December 31, 2020 and are equal to the sum of cumulative open and cumulative closed claims, including claims closed without payment. Certain product lines, particularly the Company’s specialty personal automobile insurance, tend to have a higher percentage of claims closed without payment.
The following table reconciles the net incurred and paid claims development tables presented above to the Company's liability for Property and Casualty Insurance Reserves included in the Consolidated Balance Sheet at December 31, 2020.
In 2020, the Company increased its property and casualty insurance reserves by $36.4 million to recognize adverse development of loss and LAE reserves from prior accident years. Specialty Personal Automobile insurance loss and LAE reserves developed adversely by $28.2 million due primarily to the emergence of less favorable loss patterns than expected for both liability and physical damage insurance. Specialty Commercial Automobile 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 liability insurance. Preferred Personal Automobile insurance loss and LAE reserves developed adversely by $26.7 million due primarily to the emergence of less favorable loss patterns than expected for liability insurance. Homeowners insurance loss and LAE reserves developed favorably by $2.1 million due primarily to the emergence of more favorable loss patterns than expected. Other personal lines loss and LAE reserves developed favorably by $3.5 million due primarily to the emergence of more favorable loss patterns than expected for prior accident years.
The following table presents receivables from policyholders, net of the allowance for expected credit losses including a rollforward of changes in the allowance for expected credit losses for the year ended December 31, 2020.
on the assets pledged. If the fair value of the collateral declines below these specified levels of the amount borrowed, United Insurance would be required to pledge additional collateral or repay outstanding borrowings. Upon any event of default by United Insurance, the FHLB’s recovery on the collateral is limited to the amount of United Insurance’s liability under the funding agreements to the FHLB of Chicago.
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. On June 4, 2019, the Company utilized 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, is being amortized over 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.
The Company designates debt obligations as either short-term or long-term based on maturity date at issuance, or in the case of the 2022 Senior Notes, based on the date of assumption. Total amortized cost of Long-term Debt outstanding at December 31, 2020 and 2019 was:
On June 4, 2019, the Company entered into a delayed-draw term loan facility with a borrowing capacity of $50.0 million and a maturity date four years from the borrowing date (the “2023 Term Loan”). 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 (and a mutual option to extend the maturity date by one year).
On August 14, 2020, Kemper’s subsidiary, Alliance, received approval for membership with the FHLB of San Francisco. Under its membership, Alliance may borrow from the FHLB of San Francisco through its advance program.
Kemper’s subsidiaries, United Insurance, Trinity and Alliance are members of the FHLBs of Chicago, Dallas and San Francisco, respectively. As a requirement of membership in the FHLBs, United Insurance, Trinity and Alliance maintain a certain level of investment in FHLB stock. The Company periodically uses short-term FHLB borrowings for a combination of cash management and risk management purposes, in addition to long-term FHLB borrowings for spread leading purposes. There were no short-term debt advances from the FHLBs of Chicago, Dallas or San Francisco outstanding at December 31, 2020 or December 31, 2019. For information on United Insurance’s funding agreement with the FHLB of Chicago in connection with the spread leading program, see Note 7, “Policyholder Obligations,” to the Consolidated Financial Statements.
The Company leases certain office space under non-cancelable operating leases, with initial terms typically ranging from one to fifteen years, along with options that permit renewals for additional periods. The Company also leases certain equipment under non-cancelable operating leases, with initial terms typically ranging from one to five years. Minimum rent is expensed on a straight-line basis over the term of the lease.
Lease expenses are primarily included in insurance expenses in the Consolidated Statements of Income. Additional information regarding the Company’s operating leases is presented below.
Supplemental cash flow information related to the Company’s operating leases for the year-ended December 31, 2020 is as follows:
Future minimum lease payments under finance and operating leases at December 31, 2020 were:
The total of minimum rental income to be received in the future under non-cancelable subleases was $0.3 million and $0.8 million at December 31, 2020 and 2019, respectively.
Kemper is authorized to issue 20 million shares of $0.10 par value preferred stock and 100 million shares of $0.10 par value common stock. No preferred shares were issued or outstanding at December 31, 2020 and 2019. There were 65,436,207 shares and 66,665,888 shares of common stock outstanding at December 31, 2020 and 2019, respectively.
On June 7, 2019, the Company completed a public offering of its common stock and issued 1.6 million 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 from the offering, together with a portion of the proceeds from the 2023 Term Loan (see Note 8, “Debt”) to redeem all $150.0 million in aggregate outstanding principal of its 7.375% Subordinated Debentures due 2054.
Kemper’s insurance subsidiaries are required to file financial statements prepared on the basis of statutory insurance accounting practices, a comprehensive basis of accounting other than GAAP. Statutory capital and surplus for the Company’s life and health insurance subsidiaries was $430.4 million and $408.0 million at December 31, 2020 and 2019, respectively. Statutory net income for the Company’s life and health insurance subsidiaries was $60.7 million, $90.4 million and $143.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. Statutory capital and surplus for the Company’s property and casualty insurance subsidiaries was $1.7 billion and $1.6 billion at December 31, 2020 and 2019, respectively. Statutory net income for the Company’s property and casualty insurance subsidiaries was $361.6 million, $347.6 million and $236.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. Statutory capital and surplus and statutory net income exclude parent company operations.
The design of the 2020 Omnibus Plan provides for fungible use of shares to determine the number of shares available for future grants, with a fungible conversion factor of three to one, such that the Share Authorization will be reduced at two different
rates, depending on the type of award granted. Each share of Kemper common stock issuable upon the exercise of stock options or stock appreciation rights will reduce the number of shares available for future grant under the Share Authorization by one share, while each share of Kemper common stock issued pursuant to “full value awards” will reduce the number of shares available for future grant under the Share Authorization by three shares. “Full value awards” are awards, other than stock options or stock appreciation rights, that are settled by the issuance of shares of Kemper common stock and include time-based restricted stock units (collectively “RSUs”), PSUs and deferred stock units (“DSUs”).
Outstanding equity-based compensation awards at December 31, 2020 consisted of tandem stock option and stock appreciation rights (“Tandem Awards”), RSUs, PSUs and DSUs. RSUs, PSUs and DSUs give the recipient the right to receive one share of Kemper common stock for each RSU, PSU or DSU issued. Recipients of DSUs receive full dividend equivalents on the same basis as all other outstanding shares of Kemper common stock, but do not receive voting rights until such shares are issued.
For grants under the 2011 Plan prior to November 2017, recipients of RSUs and PSUs receive full dividend equivalents on the same basis as all other outstanding shares of Kemper common stock, but do not receive voting rights until such shares are issued. Except as described below for certain equity-based compensation awards granted to each member of the Board of Directors who is not employed by the Company (“Non-employee Directors”), all outstanding awards are subject to forfeiture until certain restrictions have lapsed.
Under the Non-employee Director compensation program in effect for 2020, each Non-employee Director elected at the 2020 annual shareholder meeting received an annual RSU award with an aggregate grant date fair value of $130,000 (“Director RSUs”) at the conclusion of the meeting, and new Non-employee Directors who joined the Board received an initial award of Director RSUs valued at the percentage of the full grant date fair $130,000 value that represents the number of quarterly Board meetings the new director was expected to attend during the remaining portion of the then-current annual compensation period that ends on the date of the next annual shareholder meeting. The Director RSUs vest over a period of one year, enable the award holder to make an election to defer the conversion to shares of common stock in accordance with applicable deferral
rules, and include the right to 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
The assumptions used in the Black-Scholes pricing model for Tandem Awards granted during the years ended December 31, 2020, 2019 and 2018 are presented below.
Tandem Award activity for the year ended December 31, 2020 is presented below.
The weighted-average grant-date fair values of Tandem Awards granted during 2020, 2019 and 2018 were $19.24, $20.99 and $15.14, respectively. Total intrinsic value of Tandem Awards exercised was $7.1 million, $7.7 million and $3.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. Cash received from exercises of Tandem Awards was $5.0 million, $2.4 million and $0.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. Total tax benefit realized for tax deductions from exercises of Tandem Awards was $1.5 million, $1.6 million and $0.8 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Activity related to nonvested PSU awards for the year ended December 31, 2020 is presented below.
Thirty-three 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 solely using a Company-specific metric. Final payout for these awards, and any forfeitures of shares for performance below the “target” performance level, will be determined based on Kemper’s adjusted return on equity over a three-year performance period. The three-year performance periods for the 2020, 2019 and 2018 awards end on December 31, 2022, December 31, 2021 and December 31, 2020, respectively. Fair value for these awards was determined using the closing price of Kemper common stock on the date of grant. Accruals of compensation cost for these awards are estimated based on the probable outcome of the performance condition.
The total fair value of RSUs and PSUs that vested during the year ended December 31, 2020 was $20.4 million. The tax benefits for tax deductions realized from such awards was $4.3 million. The total fair value of RSUs and PSUs that vested during the year ended December 31, 2019 was $24.8 million. The tax benefits for tax deductions realized from such awards was $5.2 million. The total fair value of RSUs and PSUs that vested during the year ended December 31, 2018 was $8.7 million. The tax benefits for tax deductions realized from such awards was $1.8 million.
The Company’s awards of deferred stock units contain rights to receive non-forfeitable dividend equivalents and participate in the undistributed earnings with common shareholders, as did the Company’s awards of restricted stock units and performance share units prior to 2018. Accordingly, the Company is required to apply the two-class method of computing basic and diluted earnings per share. A reconciliation of the numerator and denominator used in the calculation of Basic Income from Continuing Operations Per Unrestricted Share and Diluted Income from Continuing Operations Per Unrestricted Share for the years ended December 31, 2020, 2019 and 2018 is presented below.
The components of Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (“AOCI”) for the years ended December 31, 2020, 2019 and 2018 were:
The pre-tax components of the Other Comprehensive Income (Loss) and the related Income Tax Benefit (Expense) for the years ended December 31, 2020, 2019 and 2018 were:
The components of Net Realized Gains on Sales of Investments for the years ended December 31, 2020, 2019 and 2018 were:
Insurance Expenses for the years ended December 31, 2020, 2019 and 2018 were:
The tax effects of temporary differences that give rise to significant portions of the Company’s Net Deferred Income Tax Assets and Deferred Income Tax Liabilities at December 31, 2020 and 2019 were:
The expiration of federal net operating loss (“NOL”) carryforwards and their related deferred income tax assets at December 31, 2020 is presented below by year of expiration.
The NOL carryforwards were acquired in connection with business acquisitions made in prior years and are subject to annual usage limitations under the Internal Revenue Code. The Company expects to fully utilize these federal NOL carryforwards.
There were no unrecognized tax benefits at December 31, 2020 and 2019. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense. There were no liabilities for accrued interest and penalties as of December 31, 2020 and 2019.
The statute of limitations related to Kemper and its eligible subsidiaries’ consolidated Federal income tax returns is closed for all tax years up to and including 2011. As a result of the Company filing amended federal income tax returns resulting from an election to update interest rates used to compute the tax basis of reserves on life insurance contracts issued prior to 2018, tax years 2012 and 2013 are under limited examination with respect to carryback adjustments associated with the amended returns. The statute of limitations related to tax years 2014 and 2015 has been extended to March 31, 2022.
A reconciliation of the Statutory Federal Income Tax Expense and Rate to the Company’s Effective Income Tax Expense and Rate from Continuing Operations for the years ended December 31, 2020, 2019 and 2018 is presented below.
Comprehensive Income Tax (Expense) Benefit included in the Consolidated Financial Statements for the years ended December 31, 2020, 2019 and 2018 was:
Kemper sponsors a qualified defined benefit pension plan (the “Pension Plan”). The Pension Plan covers approximately 3,175 participants and beneficiaries. Effective January 1, 2006, the Pension Plan was closed to new hires and, effective June 30, 2016, benefit accruals were frozen for substantially all of the participants under the Pension Plan. The Pension Plan is generally non-contributory, but participation requires or required some employees to contribute 3% of pay, as defined, per year. Benefits for participants who are or were required to contribute to the Pension Plan are based on compensation during plan participation and the number of years of participation. Benefits for the vast majority of participants who are not required to contribute to the Pension Plan are based on years of service and final average pay, as defined. The Company funds the Pension Plan in accordance with the requirements of ERISA.
Changes in Fair Value of Plan Assets and Changes in Projected Benefit Obligation for the Pension Plan for the years ended December 31, 2020 and 2019 is presented below.
The measurement dates of the assets and liabilities at end of year presented in the preceding table under the headings, “2020” and “2019” were December 31, 2020 and December 31, 2019, respectively.
The actuarial loss included in AOCI at December 31, 2020 is being amortized over approximately 27 years, the remaining average estimated life expectancy of participants. The Company estimates that Pension Income for the Pension Plan for the year ended December 31, 2021 will include expense of $3.0 million resulting from the amortization of the related accumulated actuarial loss included in AOCI at December 31, 2020.
In the fourth quarter of 2020, the Company’s defined benefit pension plan purchased annuities on behalf of certain plan participants currently receiving benefits and offered to make lump-sum payments to certain inactive, vested plan participants that are not currently receiving benefit payments and elected to receive lump-sum payments. Group annuity contracts were purchased from Banner Life Insurance Company (“Banner”) for $205.4 million for a portion of plan participants for whom Banner irrevocably assumed the pension obligations. For plan participants who elected lump-sum payments during the election window, a payment of $117.1 million was distributed. These transactions resulted in a partial settlement of the defined pension plan and a $50.6 million noncash settlement charge to net income for the unamortized net unrecognized postretirement benefit costs related to the settled obligations.
The weighted-average discount rate, service cost discount rate, interest cost discount rate, rate of increase in future compensation levels and expected long-term rate of return on plan assets used to develop the components of Pension Expense for the Pension Plan for the years ended December 31, 2020, 2019 and 2018 were:
On August 22, 2019, the Company made a voluntary cash contribution of $55.3 million to the Pension Plan. On July 13, 2018, the Company made a voluntary cash contribution of $5.1 million to the Pension Plan. The Company did not make a cash contribution to the Pension Plan in 2020 and does not expect that it will be required to contribute to the Pension Plan in 2021, but could make a voluntary contribution pursuant to the maximum funding limits under ERISA.
The following benefit payments (net of participant contributions), which consider expected future service of certain participants that remain eligible for a benefit accrual, as appropriate, are expected to be paid from the Pension Plan:
The Company also sponsors a non-qualified supplemental defined benefit pension plan (the “Supplemental Plan”). Benefit accruals for all participants in the Supplemental Plan were frozen effective June 30, 2016. The unfunded liability related to the Supplemental Plan was $30.7 million and $28.9 million at December 31, 2020 and 2019, respectively. Pension expense for the Supplemental Plan was $0.8 million, $1.0 million, and $0.8 million for the years ended December 31, 2020, 2019 and 2018, respectively. An actuarial loss of $2.7 million before taxes, an actuarial loss of $5.6 million before taxes and an actuarial gain of $1.3 million before taxes are included in Other Comprehensive Income (Loss) for the years ended December 31, 2020, 2019 and 2018, respectively.
The assumed health care cost trend rate used in measuring the Accumulated Postretirement Benefit Obligation at December 31, 2020 was 6.50% for 2021, gradually declining to 4.8% in the year 2027 and remaining at that level thereafter for medical benefits and 7.50% for 2021, gradually declining to 4.8% in the year 2028 and remaining at that level thereafter for prescription drug benefits. The assumed health care cost trend rate used in measuring the Accumulated Postretirement Benefit Obligation at December 31, 2019 was 7.5% for 2020, gradually declining to 4.8% in the year 2025 and remaining at that level thereafter for medical benefits and 10.0% for 2020, gradually declining to 4.8% in the year 2026 and remaining at that level thereafter for prescription drug benefits.
Segment Revenues, including a reconciliation to Total Revenues, for the years ended December 31, 2020, 2019 and 2018 were:
Segment Net Operating Income, including a reconciliation to Income from Continuing Operations, for the years ended December 31, 2020, 2019 and 2018 was:
Catastrophes and natural disasters are inherent risks of the property and casualty insurance business. These catastrophic events and natural disasters include, without limitation, hurricanes, tornadoes, earthquakes, hailstorms, wildfires, high winds and winter storms. Such events result in insured losses that are, and will continue to be, a material factor in the results of operations and financial position of the Company’s property and casualty insurance companies. Further, because the level of these insured losses occurring in any one year cannot be accurately predicted, these losses may contribute to material year-to-year fluctuations in the results of operations and financial position of these companies. Specific types of catastrophic events are more likely to occur at certain times within the year than others. This factor adds an element of seasonality to property and casualty insurance claims. The Company has adopted the industry-wide catastrophe classifications of storms and other events promulgated by the Insurance Services Office (“ISO”) to track and report losses related to catastrophes. ISO classifies a disaster as a catastrophe when the event causes $25.0 million or more in direct insured losses to property and affects a significant number of policyholders and insurers. ISO-classified catastrophes are assigned a unique serial number recognized throughout the insurance industry. The discussions that follow utilize ISO’s definition of catastrophes.
Coverage on individual catastrophes provided under the excess of loss reinsurance contracts effective January 1, 2020 to December 31, 2020 is provided in various layers as presented below.
The catastrophe reinsurance in 2020, 2019 and 2018 for the property and casualty insurance companies also included reinsurance coverage from the Florida Hurricane Catastrophe Fund (the “FHCF”) for hurricane losses in Florida at retentions lower than those described above. The Life & Health Insurance segment also purchases reinsurance from the FHCF for hurricane losses in Florida. Except for the coverage provided by the FHCF, the Life & Health Insurance segment did not carry any other catastrophe reinsurance coverage in 2019 and 2018.
Catastrophe losses and LAE (including reserve development), net of reinsurance recoveries, for the years ended December 31, 2020, 2019 and 2018 by business segment are presented below.
dwelling insurance do not include losses caused by flood. Depending on the policy, automobile insurance may provide coverage for losses caused by flood. Estimates of the number and severity of claims ultimately reported are influenced by many variables, including, but not limited to, repair or reconstruction costs and determination of cause of loss that are difficult to quantify and will influence the final amount of claim settlements. All these factors, coupled with the impact of the availability of labor and material on costs, require significant judgment in the reserve setting process. A change in any one or more of these factors is likely to result in an ultimate net claim cost different from the estimated reserve. The Company’s estimates of indirect losses from wind pools and joint underwriting associations are based on a variety of factors, including, but not limited to, actual or estimated assessments provided by or received from such entities, insurance industry estimates of losses, and estimates of the Company’s market share in the assessable states. Actual assessments may differ materially from these estimated amounts.
Trinity and Capitol County Mutual Fire Insurance Company (“Capitol”) are parties to a quota share reinsurance agreement whereby Trinity assumes 100% of the business written by Capitol, subject to a cap, for ceded losses for dwelling coverage. Earned Premiums assumed by Trinity from Capitol were $18.1 million, $19.4 million and $20.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. Capitol is a mutual insurance company and, accordingly, is owned by its policyholders. Trinity and Old Reliable Casualty Company (“ORCC”), a subsidiary of Capitol, are parties to a quota share reinsurance agreement whereby Trinity assumes 100% of the business written by ORCC, subject to a cap, for ceded losses for dwelling coverage. Earned Premiums assumed by Trinity from ORCC were $4.9 million, $5.2 million and $5.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The Company classifies its investments in Fixed Maturities as available for sale and reports these investments at fair value. The Company reports equity investments with readily determinable fair values as Equity Securities at Fair Value. Certain investments that are measured at fair value using the net asset value practical expedient are not required to be classified using the fair value hierarchy, but are presented in the following two tables to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Balance Sheet.
The valuation of assets measured at fair value in the Company’s Consolidated Balance Sheet at December 31, 2019 is summarized below.
The Company’s investments in Fixed Maturities that are classified as Level 1 in the two preceding tables primarily consist of U.S. Treasury Bonds and Notes. The Company’s investments in Equity Securities at Fair Value that are classified as Level 1 in the two preceding tables consist of either investments in publicly-traded common stocks or exchange traded funds. The Company’s investments in Fixed Maturities that are classified as Level 2 in the two preceding tables primarily consist of investments in corporate bonds, obligations of states and political subdivisions, and bonds and mortgage-backed securities of U.S. government agencies. The Company’s investments in Equity Securities at Fair Value that are classified as Level 2 in the two preceding tables primarily consist of investments in preferred stocks. The Company uses a leading, nationally recognized provider of market data and analytics to price the vast majority of the Company’s Level 2 measurements. The provider utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information. Because many fixed maturity securities do not trade on a daily basis, the provider’s evaluated pricing applications apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing
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, 2020.
Information by security type pertaining to the changes in the fair value of the Company’s investments classified as Level 3 for the year ended December 31, 2020 is presented below.
Information by security type pertaining to the changes in the fair value of the Company’s investments classified as Level 3 for the year ended December 31, 2019 is presented below.
The fair value measurement for loans to policyholders are categorized as Level 3 within the fair value hierarchy. The fair value measurement of Short-term Investments is estimated using inputs that are considered either Level 1 or Level 2 measurements. The fair value measurement of Mortgage Loans is estimated using inputs that are considered Level 2 measurements.The fair value of Debt is estimated using quoted prices for similar liabilities in markets that are not active. The inputs used in the valuation are considered Level 2 measurements. Policyholder Obligations consist of advances from the FHLB of Chicago, and the inputs used in the valuation are considered Level 2 measurements.
Attempts to estimate the ultimate outcomes of the aforementioned initiatives entail uncertainties including, but not limited to, the (i) scope and interpretation of pertinent statutes, including the criteria and methodologies to be used in comparing policy records against a death verification database, (ii) universe of policies affected, (iii) results of audits, examinations and other actions by regulators, (iv) results of the Company’s voluntary process, and (v) outcomes of any related litigation.
KCSI pursued confirmation and enforcement of the award in U.S. District Court in Texas. In September 2018, the district court confirmed the award in favor of KCSI and entered judgment against CSC in the total amount of $141.7 million. CSC appealed to the U.S. Court of Appeals for the Fifth Circuit. On January 10, 2020, the Fifth Circuit Court of Appeals affirmed the district court’s ruling in favor of KCSI.
During the pendency of the district court and appellate proceedings, CSC paid Kemper $35.7 million in September 2018 and an additional $20.1 million in April 2019 in partial satisfaction of the judgment. The Company recognized such payments in Other Income in its Consolidated Statements of Income for the years ended December 31, 2018 and December 31, 2019, respectively. In February 2020, following the Fifth Circuit Court of Appeals’ ruling, Kemper received $89.4 million in satisfaction of the remaining balance due on the judgment. The Company recognized such payment in Other Income in its Consolidated Statement of Income for the year ended December 31, 2020.
As discussed in Note 2 to the financial statements, the Company changed its method of accounting for measurement of credit losses on financial instruments in 2020.
Our audit procedures related to property and casualty insurance reserves included the following, among others:
•We tested the effectiveness of controls related to property and casualty insurance reserves, including those controls related to the estimation of and management’s review of the property and casualty insurance reserves.
◦We developed a range of independent estimates of the property and casualty insurance reserves and compared our estimates to the recorded reserves.
Our audit procedures related to the unobservable inputs used by management to estimate the fair value of fixed maturity securities without readily determinable market values included the following, among others:
•We evaluated management’s ability to accurately estimate fair value by comparing management’s historical estimates to recent or subsequent transactions, taking into account changes in market conditions.