was vacant at December 31, 2018. Kemper’s subsidiaries hold, solely for investment purposes, additional properties that are not occupied by Kemper or its subsidiaries.
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, 2018, 2017 or 2016.
The Preferred Property & Casualty Insurance segment reported Segment Net Operating Loss of $45.4 million for the year ended December 31, 2017, compared to Segment Net Operating Income of $15.6 million in 2016. Segment net operating results deteriorated by $61.0 million due primarily to higher incurred catastrophe losses and LAE (excluding reserve development) and an unfavorable change in loss and LAE reserve development, partially offset by higher net investment income and cost containment measures.
Selected financial information for the specialty personal automobile insurance product line for the years ended December 31, 2018, 2017 and 2016 is presented below.
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 DMF 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 include 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.
Earned premiums on property insurance decreased by $1.6 million in 2017, compared to 2016, due primarily to a lower volume of insurance. Incurred losses and LAE on property insurance were $24.6 million, or 33.9% of property insurance earned premiums, in 2017, compared to $25.0 million, or 33.7% of property insurance earned premiums, in 2016. Underlying losses and LAE on property insurance were $17.8 million, or 24.5% of property insurance earned premiums, in 2017, compared to $19.6 million, or 26.4% of property insurance earned premiums, in 2016, a decrease of 1.9 percentage points due primarily to lower frequency of claims. Catastrophe losses and LAE (excluding development), net of reinsurance recoveries from the Florida Hurricane Catastrophe Fund (the “FHCF”) were $5.9 million in 2017, compared to $5.5 million in 2016. Catastrophe losses and LAE, net of reinsurance from the FHCF, included catastrophe losses and LAE of $3.2 million from Hurricanes Harvey and Irma. Adverse loss and LAE reserve development was $0.9 million in 2017, compared to favorable development of $0.1 million in 2016. Insurance expenses decreased $2.4 million in 2017, compared to 2016, due primarily to lower commission expense due in part to a lower volume of earned premium.
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 were acquired by other companies.
Information pertaining to Net Impairment Losses Recognized in Earnings reported in the Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016 is presented below.
The fair value of the Company’s investments measured and reported at fair value was $7,140.1 million at December 31, 2018, of which $6,050.7 million, or 85%, were investments that were based on quoted market prices or significant value drivers that are observable, $897.4 million, or 13%, were investments where at least one significant value driver was unobservable and $192.0 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
value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level of input that is significant to the entire measurement. Such determination requires significant management judgment.
On January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Most significantly, ASU 2016-01 requires companies to measure equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily-determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer (“Modified Cost”). ASU 2016-01 also simplifies the impairment assessment of equity investments without readily-determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that an impairment of an equity investment without readily-determinable fair value exists, an entity is required to re-measure such investment at fair value.
The pro forma information is not necessarily indicative of the consolidated results of operations that might have been achieved had the transaction in fact occurred at the beginning of the periods presented, nor does the information project results for any future period. The pro forma information does not include the impact of any future cost savings or synergies that may be achieved as a result of the acquisition.
An aging of unrealized losses on the Company’s Investments in Fixed Maturities at December 31, 2017 is presented below.
In 2018, the Company decreased its property and casualty insurance reserves by $7.4 million to recognize favorable development of loss and LAE reserves from prior accident years. Personal lines insurance loss and LAE reserves developed favorably by $1.4 million, and commercial lines insurance loss and LAE reserves developed favorably by $6.1 million. Preferred Personal Automobile insurance loss and LAE reserves developed favorably by $5.8 million due primarily to the emergence of loss patterns that were better than expected for both physical damage and liability insurance for the 2017 accident year and, to a lesser extent, for liability insurance for the 2015 and prior accident years, partially offset by the emergence of loss patterns that was worse than expected for the 2016 accident year. Specialty Personal Automobile insurance loss and LAE reserves developed adversely by $5.5 million due primarily to the emergence of loss patterns that were worse than expected for both physical damage and liability insurance for the 2017 accident year, partially offset by the emergence of loss patterns that were better than expected for 2016 and prior accident years. Homeowners insurance loss and LAE reserves developed adversely by $3.2 million due primarily to the emergence of non-catastrophe loss patterns that were worse than expected for the 2016 accident year. Other personal lines loss and LAE reserves developed favorably by $4.3 million due primarily to the emergence of more favorable loss patterns than expected for the 2017 prior accident years. Commercial lines insurance loss and LAE reserves included favorable development of $3.9 million and $2.2 million from continuing operations and discontinued operations, respectively.
Reinsurance and indemnification recoverables on property and casualty insurance reserves were $101.9 million and $53.1 million at December 31, 2018 and 2017, respectively. These recoverables are concentrated with several reinsurers, the vast majority of which are highly rated by one or more of the principal investor and/or insurance company rating agencies. While most of these recoverables were unsecured at December 31, 2018 and 2017, the agreements with the reinsurers generally provide for some form of collateralization upon the occurrence of certain events.
Kemper’s insurance subsidiaries are also required to hold minimum levels of statutory capital and surplus to satisfy regulatory requirements. The minimum statutory capital and surplus, or company action level RBC, necessary to satisfy regulatory requirements for the Company’s life and health insurance subsidiaries collectively was $133.7 million at December 31, 2018. The minimum statutory capital and surplus necessary to satisfy regulatory requirements for the Company’s property and casualty insurance subsidiaries collectively was $595.1 million at December 31, 2018. Company action level RBC is the level at which a company is required to file a corrective action plan with its regulators and is equal to 200% of the authorized control level RBC.
The Company uses the Black-Scholes option pricing model to estimate the fair value of each Tandem Award on the date of grant. The expected terms of Tandem Awards are developed by considering the Company’s historical Tandem Award exercise experience, demographic profiles, historical share retention practices of employees and assumptions about their propensity for early exercise in the future. Expected volatility is estimated using weekly historical volatility. The Company believes that historical volatility is currently the best estimate of expected volatility. The dividend yield in 2018, 2017 and 2016 was calculated by taking the natural logarithm of the annualized yield divided by the Kemper common stock price on the date of grant. The risk-free interest rate was the yield on the grant date of U.S. Treasury zero coupon issues with a maturity comparable to the expected term of the option.
Activity related to nonvested PSU awards for the year ended December 31, 2018 is presented below.
Comprehensive Income Tax Benefit (Expense) included in the Consolidated Financial Statements for the years ended December 31, 2018, 2017 and 2016 was:
On July 13, 2018, the Company made a voluntary cash contribution of $5.1 million to the Pension Plan. The Company did not contribute to the Pension Plan in 2017. On August 12, 2016, the Company made a voluntary cash contribution of $9.0 million to the Pension Plan. The Company does not expect that it will be required to contribute to the Pension Plan in 2019, but could make a voluntary contribution pursuant to the maximum funding limits under ERISA.
The measurement dates of the assets and liabilities at end of year in the preceding table under the headings “2018” and “2017” were December 31, 2018 and December 31, 2017, respectively.
Segment Net Operating Income, including a reconciliation to Income from Continuing Operations, for the years ended December 31, 2018, 2017 and 2016 was:
For an investment in a fixed maturity security, an increase in the yield used to determine the fair value of the security will decrease the fair value of the security. A decrease in the yield used to determine fair value will increase the fair value of the security, but the fair value increase is generally limited to par, unless callable at a premium, if the security is currently callable.