KEMPER CORPORATION Index to
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Summary of Results 28
Catastrophes
31
Loss andLAE Reserve Development
33
Non-GAAP Financial Measures
33
Specialty Property & Casualty Insurance
35
Preferred Property & Casualty Insurance 40Life & Health Insurance 46 Investment Results 50 Investment Quality and Concentrations
52
Investments in Limited Liability Companies and Limited Partnerships 55 Expenses 56 Income Taxes 57 Liquidity and Capital Resources
57
Contractual Obligations
61
Critical Accounting Estimates
61
Off-Balance Sheet Arrangements
66
Recently Issued Accounting Pronouncements 67
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SUMMARY OF RESULTS Net Income was$409.9 million ($6.24 per unrestricted common share) for the year endedDecember 31, 2020 , compared to$531.1 million ($8.04 per unrestricted common share) for the year endedDecember 31, 2019 . Beginning inMarch 2020 , the global pandemic associated with COVID-19 and related economic conditions began to impact the Company's results of operations. The Company incurred additional expenses associated with COVID-19 and related economic conditions. The Company's investment results were also negatively impacted by the recent disruption in global financial markets. For further discussion regarding the potential impacts of COVID-19 and related economic conditions on the Company, see "Caution Regarding Forward-Looking Statements" beginning on page 1 and Item 1A., Risk Factors, of Part I of this Annual Report on Form 10-K. As part of the Company's response to the COVID-19 pandemic, the Company recognized approximately$100 million of premium credits as a reduction to earned premiums in the second quarter of 2020. See MD&A, "Specialty Property & Casualty Insurance " and "Preferred Property & Casualty Insurance ", for additional information. The credits were applied directly to the policyholder's account statement. If a policyholder had paid in full, the policyholder received a refund of the credited amounts. A reconciliation of Net Income to Adjusted Consolidated Net Operating Income (a non-GAAP financial measure) for the years endedDecember 31, 2020 , 2019 and 2018 is presented below. Increase Increase (Decrease) (Decrease) in Income in Income from 2019 from 2018 DOLLARS IN MILLIONS 2020 2019 to 2020 2018 to 2019 Net Income$ 409.9 $ 531.1
- - - 1.7 (1.7)
Income from Continuing Operations 409.9 531.1 (121.2) 188.4 342.7
Less:
Income (Loss) from Change in Fair Value of Equity and Convertible Securities 57.0 109.7 (52.7) (50.8) 160.5 Net Realized Gains on Sales of Investments 30.1 33.1 (3.0) 20.9 12.2 Impairment Losses (15.4) (10.9) (4.5) (3.6) (7.3) Acquisition Related Transaction, Integration and Other Costs (50.0) (14.5) (35.5) (36.5) 22.0 Debt Extinguishment, Pension and Other Charges (50.6) (4.6) (46.0) - (4.6)
Adjusted Consolidated Net Operating Income
Components of Adjusted Consolidated Net Operating Income: Segment Net Operating Income: Specialty Property & Casualty Insurance$ 337.9 $ 283.1
3.5 41.9 (38.4) 25.7 16.2
Life & Health Insurance 60.0 98.7 (38.7) 91.5 7.2
Segment Net Operating Income 401.4 423.7 (22.3) 233.0 190.7
Corporate and Other Net Operating Income
(Loss) From:
Effects of Tax Law Changes - - - 26.4 (26.4)
Partial Satisfaction of Judgment 70.6 15.9 54.7 28.2 (12.3)
Other (33.2) (21.3) (11.9) (29.2) 7.9
Corporate and Other Net Operating Income
(Loss) 37.4 (5.4) 42.8 25.4 (30.8)
Adjusted Consolidated Net Operating Income
$ 20.5 $ 258.4 $ 159.9 28
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SUMMARY OF RESULTS (Continued) Net Income 2020 Compared with 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 theSpecialty Property & Casualty Insurance segment, segment net operating income increased by$54.8 million due primarily to an improvement in underlying losses and LAE as a percentage of earned premiums and higher investment income, partially offset by the impact of adverse loss reserve development. Underlying losses and LAE exclude the impact of catastrophes and loss and LAE reserve development. See MD&A, "Specialty Property & Casualty Insurance ," beginning on page 35 for additional discussion of the segment's results. In thePreferred 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. In theLife & Health Insurance segment, segment net operating income decreased by$38.7 million due primarily to higher mortality for life insurance claims due primarily to COVID-19. See MD&A, "Life & Health Insurance ," beginning on page 46 for additional discussion of the segment's results. Corporate and Other net operating income increased due primarily to a gain recognized for the satisfaction of the remaining balance of a final judgment againstComputer 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. 2019 Compared with 2018 The Company's net income increased by$341.0 million in 2019, compared to 2018, due primarily to higher Adjusted Consolidated Net Operating Income, higher investment results and lower acquisition related transaction, integration and other costs. Adjusted Consolidated Net Operating Income increased by$159.9 million in 2019, compared to 2018, due primarily to higherSpecialty Property & Casualty Insurance andPreferred Property & Casualty Insurance segment net operating income, partially offset by a reduction in Corporate and Other Net Operating Income. In theSpecialty 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 thePreferred 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. 29
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SUMMARY OF RESULTS (Continued) In theLife & 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 againstComputer 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. Revenues 2020 Compared with 2019 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 endedDecember 31, 2020 included premium credits of$99.8 million related to COVID-19. Earned Premiums in theSpecialty Property & Casualty Insurance segment increased by$256.9 million for the year endedDecember 31, 2020 .Specialty Property & Casualty Insurance segment Earned Premiums for the year endedDecember 31, 2020 included premium credits of$87.1 million related to COVID-19. Earned Premiums in thePreferred Property & Casualty Insurance segment decreased by$62.1 million for the year endedDecember 31, 2020 .Preferred Property & Casualty Insurance segment Earned Premiums for the year endedDecember 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. Net Investment Income decreased by$16.1 million in 2020 due primarily to lower yields on fixed income securities and higher investment expenses, partially offset by higher rate of return from Alternative Investments and higher levels of investments in fixed income securities. Net Investment Income from Alternative Investments related to Equity Method Limited Liability investments increased by$3.9 million . Net Investment Income from Alternative Investments related to limited liability investments included in eitherEquity Securities at Fair Value orEquity Securities at Modified Cost increased by$4.1 million . Other Income increased by$59.1 million for the year endedDecember 31, 2020 , compared to the same period in 2019. Other Income for the year endedDecember 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. InJuly 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 endedDecember 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 endedDecember 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. 2019 Compared with 2018 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 theSpecialty Property & Casualty Insurance segment, Preferred Property & Casualty Insurance Segment andLife & 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. 30
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SUMMARY OF RESULTS (Continued) Net Investment Income increased by$23.4 million in 2019 due primarily to higher levels of investments, largely due to the inclusion of the Infinity portfolio beginning inJuly 2018 , partially offset by a lower rate of return from Alternative Investments. Net Investment Income from Alternative Investments, which consist of Equity Method Limited Liability Investments, and other limited liability investments included inEquity Securities at Fair Value orEquity Securities at Modified Cost, increased by$18.4 million . Alternative investment income from Equity Method Limited Liability Investments decreased by$10.0 million . Alternative investment income from limited liability investments included in eitherEquity Securities at Fair Value orEquity Securities at Modified Cost decreased by$8.4 million for the year endedDecember 31, 2019 , compared to the same period in 2018. See MD&A, "Investment Results," under the sub-caption "Net Investment Income" beginning on page 50 for additional discussion. Other Income decreased by$6.7 million for the year endedDecember 31, 2019 , compared to the same period in 2018. Other Income for the year endedDecember 31, 2019 includes a gain of$20.1 million , compared to a gain of$35.7 million for the same period in 2018 related to the partial satisfaction of a final judgment against CSC. See Note 23, "Contingencies." to the Consolidated Financial Statements for additional discussion. InJuly 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 endedDecember 31, 2019 includes a gain of$3.8 million related to this agreement. Other Income for the year endedDecember 31, 2019 includes income of$7.8 million , compared to income of$3.6 million for the same period in 2018 from the Company's corporate-owned life insurance ("COLI") policies. Other Income from COLI increased due in part to the purchase of additional life insurance in the second and fourth quarters of 2019. Net Realized Gains on Sales of Investments were$41.9 million in 2019, compared to$26.4 million in 2018. See MD&A, "Investment Results," under the sub-caption "Net Realized Gains on Sales of Investments" beginning on page 51 for additional discussion. Impairment Losses in 2019 and 2018 were$13.8 million and$4.5 million , respectively. See MD&A, "Investment Results," under the sub-caption "Impairment Losses" beginning on page 52 for additional discussion. The Company cannot predict when or if similar investment gains or losses may occur in the future. CATASTROPHES 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 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. 31
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CATASTROPHES (Continued) 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 endedDecember 31, 2020 , 2019 and 2018 are presented below. Year Ended Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Number of Losses and Number of Losses and Number of Losses and DOLLARS IN MILLIONS Events LAE Events LAE Events LAE Range of Losses and LAE Per Event: Below$5 60$ 51.2 56$ 42.4 45$ 34.7 $5 -$10 5 40.2 3 20.8 4 27.6$10 -$15 - - 1 14.0 - -$15 -$20 1 15.3 - - - -$20 -$25 - - - - - - Greater Than$25 - - - - 1 33.7 Total 66$ 106.7 60$ 77.2 50$ 96.0 Specialty Property & Casualty Insurance$ 12.3 $ 11.1 $ 4.7 Preferred Property & Casualty Insurance 82.0 63.0 87.3 Life & Health Insurance 12.4 3.1 4.0 Total Catastrophe Losses and LAE$ 106.7 $ 77.2 $ 96.0 Catastrophe Reinsurance 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'sSpecialty Property & Casualty Insurance andPreferred Property & Casualty Insurance segments. Coverage under the catastrophe reinsurance program is provided in various contracts and layers. The Company'sSpecialty Property & Casualty Insurance andPreferred Property & Casualty Insurance segments also purchase reinsurance from the FHCF for hurricane losses inFlorida at retentions lower than its catastrophe reinsurance program.The Life & Health Insurance segment also purchases reinsurance from the FHCF for hurricane losses inFlorida and is party to the Property & Casualty catastrophe reinsurance program for its Kemper Home Service companies. In 2018, the Company had reinsurance recoveries of$31.8 million under its catastrophe reinsurance programs primarily driven by the 2017 and 2018California wildfires. In 2019, the Company entered into a sale of subrogation rights resulting in a reduction of the reinsurance recoveries of$15.5 million . In 2020, the reinsurance recoveries were further reduced by$1.5 million . Catastrophe recoveries under the FHCF were not material in 2020, 2019, or 2018. In 2020, 2019 and 2018 the Company paid$0.0 million ,$0.0 million and$0.4 million in reinstatement premium, respectively. See the "Reinsurance" subsection of the "Property and Casualty Insurance Business" and "Life and Health Insurance Business" sections of Item 1(c), "Description of Business," and Note 20, "Catastrophe Reinsurance," to the Consolidated Financial Statements for additional information on the Company's reinsurance programs. 32
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LOSS AND LAE RESERVE DEVELOPMENT Increases (decreases) in the Company's property and casualty loss and LAE reserves for the years endedDecember 31, 2020 , 2019 and 2018 to recognize adverse (favorable) loss and LAE reserve development from prior accident years in continuing operations, hereinafter also referred to as "reserve development" in the discussion of segment results, are presented below. DOLLARS IN MILLIONS 2020 2019 2018 Increase (Decrease) in Total Loss and LAE Reserves Related toPrior Years : Non-catastrophe$ 36.2 $ (54.0) $ 1.0 Catastrophe 0.2 (17.1) (8.4)
Increase (Decrease) in Total Loss and LAE Reserves Related to
$ 36.4
See MD&A, "Specialty Property & Casualty Insurance ," MD&A, "Preferred Property & Casualty Insurance ," MD&A, "Life & Health Insurance ," and Note 6, "Property and Casualty Insurance Reserves," to the Consolidated Financial Statements for additional information on the Company's reserve development. See MD&A, "Critical Accounting Estimates," of this 2020 Annual Report for additional information pertaining to the Company's process of estimating property and casualty insurance reserves for losses and LAE, and the estimated variability thereof, development of property and casualty insurance losses and LAE, and a discussion of some of the variables that may impact them. NON-GAAP FINANCIAL MEASURES Pursuant to the rules and regulations of theSEC , the Company is required to file consolidated financial statements prepared in accordance with the accounting principles generally accepted inthe United States ("GAAP"). The Company is permitted to include non-GAAP financial measures in its filings provided that they are defined along with an explanation of their usefulness to investors, are no more prominent than the comparable GAAP financial measures and are reconciled to such GAAP financial measures. These non-GAAP financial measures should not be considered a substitute for the comparable GAAP financial measures, as they do not fully recognize the overall profitability of the Company's businesses. Underlying Losses and LAE and Underlying Combined Ratio 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 Underlying Combined Ratio is computed by adding the Current Year Non-catastrophe Losses and LAE Ratio with the Insurance Expense Ratio. The most directly comparable GAAP financial measure is the Combined Ratio, which is computed by adding Total Incurred Losses and LAE Ratio, including the impact of catastrophe losses and loss and LAE reserve development from prior years, with the Insurance Expense Ratio. The Company believes Underlying Losses and LAE and the Underlying Combined Ratio are useful to investors and uses these financial measures to reveal the trends in the Company'sProperty & Casualty Insurance segment that may be obscured by catastrophe losses and prior-year reserve development. These catastrophe losses may cause the Company's loss trends to vary significantly between periods as a result of their incidence of occurrence and magnitude and can have a significant impact on incurred losses and LAE and the Combined Ratio. Prior-year reserve developments are caused by unexpected loss development on historical reserves. Because reserve development relates to the re-estimation of losses from earlier periods, it has no bearing on the performance of the Company's insurance products in the current period. The Company believes it is useful for investors to evaluate these components separately and in the aggregate when reviewing the Company's underwriting performance. Adjusted Consolidated Net Operating Income Adjusted Consolidated Net Operating Income is an after-tax, non-GAAP financial measure and is computed by excluding from Income from Continuing Operations the after-tax impact of: (i) Income (Loss) from Change in Fair Value ofEquity and Convertible Securities ; (ii) Net Realized Gains on Sales of Investments; 33
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NON-GAAP FINANCIAL MEASURES (Continued) (iii) Impairment Losses; (iv) Acquisition Related Transaction, Integration and Other Costs; (v) Debt Extinguishment, Pension and Other Charges; and (vi) Significant non-recurring or infrequent items that may not be indicative of ongoing operations 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 endedDecember 31, 2020 , 2019 or 2018. The Company believes that Adjusted Consolidated Net Operating Income provides investors with a valuable measure of its ongoing performance because it reveals underlying operational performance trends that otherwise might be less apparent if the items were not excluded. Income (Loss) from Change in Fair Value ofEquity and Convertible Securities , Net Realized Gains on Sales of Investments and Impairment Losses related to investments included in the Company's results may vary significantly between periods and are generally driven by business decisions and external economic developments such as capital market conditions that impact the values of the Company's investments, the timing of which is unrelated to the insurance underwriting process. Acquisition Related Transaction and Integration Costs may vary significantly between periods and are generally driven by the timing of acquisitions and business decisions which are unrelated to the insurance underwriting process. Debt Extinguishment, Pension and Other Charges relate to (i) loss from early extinguishment of debt, which is driven by the Company's financing and refinancing decisions and capital needs, as well as external economic developments such as debt market conditions, the timing of which is unrelated to the insurance underwriting process; (ii) settlement of pension plan obligations which are business decisions are made by the Company, the timing of which is unrelated to the underwriting process; and (iii) other charges that are non-standard, not part of the ordinary course of business, and unrelated to the insurance underwriting process. Significant non-recurring items are excluded because, by their nature, they are not indicative of the Company's business or economic trends. The preceding non-GAAP financial measures should not be considered a substitute for the comparable GAAP financial measures, as they do not fully recognize the overall profitability of the Company's businesses. 34
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SPECIALTY PROPERTY & CASUALTY INSURANCE Selected financial information for theSpecialty Property & Casualty Insurance segment is presented below. DOLLARS IN MILLIONS 2020 2019 2018 Net Premiums Written$ 3,435.5 $ 3,211.3 $ 2,067.4 Earned Premiums$ 3,335.3 $ 3,078.4 $ 2,027.4 Net Investment Income 114.1 107.5 63.4 Other Income 1.8 7.0 2.4 Total Revenues 3,451.2 3,192.9 2,093.2 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE 2,350.8 2,302.4 1,517.4 Catastrophe Losses and LAE 12.3 11.1 4.7 Prior Years: Non-catastrophe Losses and LAE 15.1 (35.1) 2.0 Catastrophe Losses and LAE 0.2 0.5 (0.3) Total Incurred Losses and LAE 2,378.4 2,278.9 1,523.8 Insurance Expenses 651.9 555.6 421.7 Other Expenses - 2.5 2.1 Operating Profit 420.9 355.9 145.6 Income Tax Expense (83.0) (72.8) (29.8) Segment Net Operating Income $
337.9
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio 70.4 % 74.7 % 74.9 %
Current Year Catastrophe Losses and LAE Ratio 0.4 0.4 0.2
Prior Years Non-catastrophe Losses and LAE Ratio 0.5 (1.1) 0.1
Prior Years Catastrophe Losses and LAE Ratio - - -
Total Incurred Loss and LAE Ratio 71.3 74.0 75.2
Insurance Expense Ratio 19.5 18.0 20.8
Combined Ratio 90.8 % 92.0 % 96.0 %
Underlying Combined Ratio
Current Year Non-catastrophe Losses and LAE Ratio 70.4 % 74.7 % 74.9 %
Insurance Expense Ratio 19.5 18.0 20.8
Underlying Combined Ratio 89.9 % 92.7 % 95.7 %
Non-GAAP Measure Reconciliation
Combined Ratio 90.8 % 92.0 % 96.0 %
Less:
Current Year Catastrophe Losses and LAE Ratio 0.4 0.4 0.2
Prior Years Non-catastrophe Losses and LAE Ratio 0.5 (1.1) 0.1
Prior Years Catastrophe Losses and LAE Ratio - - -
Underlying Combined Ratio 89.9 % 92.7 % 95.7 %
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SPECIALTY PROPERTY & CASUALTY INSURANCE (Continued)
INSURANCE RESERVES
Dec 31, Dec 31,
DOLLARS IN MILLIONS 2020 2019
Insurance Reserves:
Non-Standard Automobile $ 1,308.3 $ 1,321.9
Commercial Automobile 236.5 229.1
Total Insurance Reserves $ 1,544.8 $ 1,551.0
Insurance Reserves:
Loss and Allocated LAE Reserves:
Case and Allocated LAE $ 744.6 $ 730.0
Incurred But Not Reported 653.6 672.2
Total Loss and LAE Reserves 1,398.2 1,402.2
Unallocated LAE Reserves 146.6 148.8
Total Insurance Reserves $ 1,544.8 $ 1,551.0
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.
Overall
2020 Compared with 2019
The Specialty Property & Casualty Insurance segment reported Segment Net
Operating Income of $337.9 million for the year ended December 31, 2020 ,
compared to $283.1 million in 2019. Segment Net Operating Income increased by
$54.8 million due primarily to an improvement in underlying losses and LAE as a
percentage of earned premiums and higher investment income, partially offset by
the impact of adverse loss reserve development. Underlying losses and LAE
exclude the impact of catastrophes and loss and LAE reserve development.
Earned Premiums in the Specialty Property & Casualty Insurance segment increased
by $256.9 million in 2020, compared to 2019, driven primarily by higher volume,
partially offset by the impact of premium credits of $87.1 million issued to
policyholders during the second quarter of 2020. Both of the segment's product
lines had higher volume, although the overall impact on earned premiums was
driven primarily by specialty personal automobile insurance.
Net Investment Income in the Specialty Property & Casualty Insurance segment
increased by $6.6 million in 2020, compared to 2019, due primarily to a higher
return on Alternative Investments and higher levels of fixed income securities,
partially offset by lower yields on fixed income securities.
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.
Underlying losses and LAE as a percentage of earned premiums were 70.4% in 2020,
an improvement of 4.3 percentage points, compared to 2019, due primarily to
improvements in claim frequency. Underlying losses and LAE exclude the impact of
catastrophes and loss and LAE reserve development. Catastrophe losses and LAE
(excluding reserve development) were $12.3 million in 2020, compared to $11.1
million in 2019, an increase of $1.2 million . Unfavorable loss and LAE reserve
development (including catastrophe reserve development) was $15.3 million in
2020, compared to favorable development of $34.6 million in 2019.
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SPECIALTY PROPERTY & CASUALTY INSURANCE (Continued) 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.The Specialty Property & Casualty Insurance segment's effective income tax rate differs from the federal statutory income tax rate due primarily to tax-exempt investment income and dividends received deductions. 2019 Compared with 2018The Specialty Property & Casualty Insurance segment reported Segment Net Operating Income of$283.1 million for the year endedDecember 31, 2019 , compared to$115.8 million in 2018. Segment net operating results improved by$167.3 million due primarily to the acquisition of Infinity in 2018 and favorable loss and LAE reserve development. Earned Premiums in theSpecialty 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. Net Investment Income in theSpecialty Property & Casualty Insurance segment increased by$44.1 million in 2019, compared to 2018, due primarily to a higher investment base, largely due to the inclusion of the Infinity investment portfolio for the entire year in 2019 versus only a six month period in 2018, partially offset by lower rate of return on alternative investments. 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. Insurance expenses were$555.6 million , or 18.0% of earned premiums, in 2019, an improvement of 2.8% percentage points, compared to 2018, due primarily to lower amortization of Infinity purchase accounting adjustments in 2019, versus 2018. Acquisition of Infinity As discussed in Note 3, "Acquisition of Business," to the Consolidated Financial Statements, the Company completed its acquisition of Infinity onJuly 2, 2018 . The results of Infinity's operations have been included in the Company's consolidated financial results from the date of its acquisition and forward. 37
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SPECIALTY PROPERTY & CASUALTY INSURANCE (Continued) Specialty Personal Automobile Insurance Selected financial information for the specialty personal automobile insurance product line for the years endedDecember 31, 2020 , 2019 and 2018 is presented below. DOLLARS IN MILLIONS 2020 2019 2018 Net Premiums Written$ 3,086.5 $ 2,941.1 $ 1,927.9 Earned Premiums$ 3,031.3 $ 2,825.6 $ 1,889.5 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE$ 2,160.9 $ 2,131.5 $ 1,418.2 Catastrophe Losses and LAE 11.6 9.9 3.9 Prior Years: Non-catastrophe Losses and LAE 28.0 (24.3) 5.7 Catastrophe Losses and LAE 0.2 0.5 (0.2) Total Incurred Losses and LAE$ 2,200.7 $ 2,117.6 $ 1,427.6 Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 71.3 % 75.4 % 75.1 % Current Year Catastrophe Losses and LAE Ratio 0.4 0.4 0.2 Prior Years Non-catastrophe Losses and LAE Ratio 0.9 (0.9) 0.3 Prior Years Catastrophe Losses and LAE Ratio - - - Total Incurred Loss and LAE Ratio 72.6 % 74.9 % 75.6 % 2020 Compared with 2019 Earned Premiums on specialty personal automobile insurance increased by$205.7 million in 2020, compared to 2019, due primarily to higher volume, partially offset by premium credits of$83.5 million issued to policyholders during the second quarter of 2020. Incurred losses and LAE were$2,200.7 million , or 72.6% of earned premiums, in 2020, compared to$2,117.6 million , or 74.9% of earned premiums, in 2019. Incurred losses and LAE as a percentage of earned premiums improved primarily due to an improvement in underlying losses and LAE as a percentage of earned premiums, partially offset by adverse loss reserve development. Underlying losses and LAE as a percentage of related earned premiums were 71.3% in 2020, compared to 75.4% in 2019, an improvement of 4.1 percentage points due primarily to improvements in claim frequency. Catastrophe losses and LAE (excluding reserve development) were$11.6 million in 2020, compared to$9.9 million in 2019. Unfavorable loss and LAE reserve development was$28.2 million in 2020, compared to favorable development of$23.8 million in 2019. 2019 Compared with 2018 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$5.5 million in 2018. 38
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SPECIALTY PROPERTY & CASUALTY INSURANCE (Continued) Commercial Automobile Insurance Selected financial information for the commercial automobile insurance product line is presented below. DOLLARS IN MILLIONS 2020 2019 2018 Net Premiums Written$ 349.0 $ 270.2 $ 139.5 Earned Premiums$ 304.0 $ 252.8 $ 137.9 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE$ 189.9 $ 170.9 $ 99.2 Catastrophe Losses and LAE 0.7 1.2 0.8 Prior Years: Non-catastrophe Losses and LAE (12.9) (10.8) (3.7) Catastrophe Losses and LAE - - (0.1) Total Incurred Losses and LAE$ 177.7 $
161.3
Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 62.5 % 67.6 % 72.0 % Current Year Catastrophe Losses and LAE Ratio 0.2 0.5 0.6 Prior Years Non-catastrophe Losses and LAE Ratio (4.2) (4.3) (2.7) Prior Years Catastrophe Losses and LAE Ratio - - (0.1) Total Incurred Loss and LAE Ratio 58.5 %
63.8 % 69.8 %
2020 Compared with 2019 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. 2019 Compared with 2018 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$3.8 million in 2018. 39
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PREFERRED PROPERTY & CASUALTY INSURANCE Selected financial information for thePreferred Property & Casualty Insurance segment is presented below. DOLLARS IN MILLIONS 2020 2019 2018 Net Premiums Written$ 653.0 $ 739.3 $ 748.8 Earned Premiums$ 688.2 $ 750.3 $ 730.7 Net Investment Income 37.7 44.1 61.8 Other Income 0.1 - - Total Revenues 726.0 794.4 792.5 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE 400.9 481.8 459.4 Catastrophe Losses and LAE 82.0 63.0 87.3 Prior Years: Non-catastrophe Losses and LAE 20.7 (17.6) (0.1) Catastrophe Losses and LAE (0.5) (18.4) (8.2) Total Incurred Losses and LAE 503.1 508.8 538.4 Insurance Expenses 221.1 233.3 225.5 Operating Profit (Loss) 1.8 52.3 28.6 Income Tax Benefit (Expense) 1.7 (10.4) (2.9) Segment Net Operating Income (Loss)$ 3.5 $
41.9
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio 58.3 % 64.2 % 62.9 %
Current Year Catastrophe Losses and LAE Ratio 11.9 8.4 11.9
Prior Years Non-catastrophe Losses and LAE Ratio 3.0 (2.3) -
Prior Years Catastrophe Losses and LAE Ratio (0.1) (2.5) (1.1)
Total Incurred Loss and LAE Ratio 73.1 67.8 73.7
Insurance Expense Ratio 32.1 31.1 30.9
Combined Ratio 105.2 % 98.9 % 104.6 %
Underlying Combined Ratio
Current Year Non-catastrophe Losses and LAE Ratio 58.3 % 64.2 % 62.9 %
Insurance Expense Ratio 32.1 31.1 30.9
Underlying Combined Ratio 90.4 % 95.3 % 93.8 %
Non-GAAP Measure Reconciliation
Combined Ratio 105.2 % 98.9 % 104.6 %
Less:
Current Year Catastrophe Losses and LAE Ratio 11.9 8.4 11.9
Prior Years Non-catastrophe Losses and LAE Ratio 3.0 (2.3) -
Prior Years Catastrophe Losses and LAE Ratio (0.1) (2.5) (1.1)
Underlying Combined Ratio 90.4 % 95.3 % 93.8 %
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PREFERRED PROPERTY & CASUALTY INSURANCE (Continued)
CATASTROPHE FREQUENCY AND SEVERITY
Dec 31, 2020 Dec 31, 2019
Number of Losses and Number of Losses and
DOLLARS IN MILLIONS Events LAE Events LAE
Range of Losses and LAE Per Event:
Below $5 48 $ 42.0 53 $ 30.9
$5 - $10 5 40.0 3 19.0
$10 - $15 - - 1 13.1
$15 - $20 - - - -
$20 - $25 - - - -
Greater Than $25 - - - -
Total 53 $ 82.0 57 $ 63.0
INSURANCE RESERVES
Dec 31, Dec 31,
DOLLARS IN MILLIONS 2020 2019
Insurance Reserves:
Preferred Automobile $ 281.3 $ 262.3
Homeowners 104.0 95.3
Other 26.3 30.9
Total Insurance Reserves $ 411.6 $ 388.5
Insurance Reserves:
Loss and Allocated LAE Reserves:
Case and Allocated LAE $ 262.2 $ 241.3
Incurred But Not Reported 122.0 118.8
Total Loss and LAE Reserves 384.2 360.1
Unallocated LAE Reserves 27.4 28.4
Total Insurance Reserves $ 411.6 $ 388.5
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.
Overall
2020 Compared with 2019
The Preferred Property & Casualty Insurance segment reported Segment Net
Operating Income of $3.5 million for the year ended December 31, 2020 , compared
to $41.9 million in 2019. Segment Net Operating Income decreased by $38.4
million due primarily to higher catastrophe losses and LAE (excluding loss
reserve development), the impact of adverse loss and LAE reserve development and
lower net investment income, partially offset by an improvement in underlying
losses and LAE as a percentage of earned premiums.
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
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PREFERRED PROPERTY & CASUALTY INSURANCE (Continued) 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 thePreferred 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. Underlying losses and LAE as a percentage of earned premiums were 58.3% and 64.2% in 2020 and 2019, respectively. Catastrophe losses and LAE (excluding reserve development) were$82.0 million in 2020, compared to$63.0 million in 2019, which is a increase of$19.0 million . Catastrophe losses and LAE (excluding reserve development) increased due primarily to an increase in both frequency and severity of catastrophic events in 2020, compared to 2019. There were five catastrophic events above$5 million in 2020, compared to four catastrophic events above$5 million in 2019. Adverse loss and LAE reserve development (including catastrophe reserve development) was$20.2 million in 2020, compared to favorable development of$36.0 million in 2019. Favorable catastrophe reserve development in 2019 included the impact of the recognition and sale in the third quarter of 2019 of the Company's subrogation rights related to certainCalifornia wildfires that had occurred in 2017 and 2018. Insurance expenses were$221.1 million , or 32.1% of earned premiums, in 2020, a deterioration of 1.0 percentage points compared to 2019. Excluding the impact of premium credits, insurance expenses were 31.5% of earned premiums.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. 2019 Compared with 2018The Preferred Property & Casualty Insurance segment reported Segment Net Operating Income of$41.9 million for the year endedDecember 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 thePreferred Property & Casualty Insurance segment increased by$19.6 million in 2019, compared to 2018, due primarily to higher average earned premium inPreferred Automobile Insurance andOther Personal Insurance partially offset a decrease in volume for Preferred Automobile, Homeowners, andOther Insurance . Net Investment Income in thePreferred Property & Casualty Insurance segment decreased by$17.7 million in 2019, compared to 2018, due primarily to a lower rate of return on alternative investments. 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 certainCalifornia wildfires that had occurred in 2017 and 2018. Insurance expenses were$233.3 million , or 31.1% of earned premiums, in 2019, a deterioration of 0.2 percentage points compared to 2018. 42
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PREFERRED PROPERTY & CASUALTY INSURANCE (Continued) Preferred Personal Automobile Insurance Selected financial information for the preferred personal automobile insurance product line is presented below. DOLLARS IN MILLIONS 2020 2019 2018 Net Premiums Written$ 407.5 $ 468.9 $ 462.1 Earned Premiums$ 431.7 $ 470.2 $ 440.2 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE 279.9 332.5 308.8 Catastrophe Losses and LAE 4.4 7.8 7.2 Prior Years: Non-catastrophe Losses and LAE 27.7 (8.2) (5.7) Catastrophe Losses and LAE (1.0) - (0.1) Total Incurred Losses and LAE$ 311.0 $
332.1
Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 64.8 % 70.6 % 70.2 % Current Year Catastrophe Losses and LAE Ratio 1.0 1.7 1.6 Prior Years Non-catastrophe Losses and LAE Ratio 6.4 (1.7) (1.3) Prior Years Catastrophe Losses and LAE Ratio (0.2) - - Total Incurred Loss and LAE Ratio 72.0 %
70.6 % 70.5 %
2020 Compared with 2019 Earned premiums on preferred personal automobile insurance decreased by$38.5 million in 2020, compared to 2019, due primarily to lower volume and the impact of premium credits of$12.7 million issued to policyholders during the second quarter of 2020. Incurred losses and LAE were$311.0 million , or 72.0% of earned premiums, in 2020, compared to$332.1 million , or 70.6% of earned premiums, in 2019. Incurred losses and LAE as a percentage of earned premiums increased due primarily to adverse loss and LAE reserve development. Underlying losses and LAE as a percentage of earned premiums were 64.8% in 2020, compared to 70.6% in 2019, which was an improvement of 5.8 percentage points due primarily to improvements in claim frequency in 2020. Adverse loss and LAE reserve development (including catastrophe loss reserve development) was$26.7 million in 2020, compared to favorable development of$8.2 million in 2019. Catastrophe losses and LAE (excluding reserve development) were$4.4 million in 2020, compared to$7.8 million in 2019. 2019 Compared with 2018 Earned premiums in preferred personal automobile insurance increased by$30.0 million in 2019, compared to 2018, due primarily to higher average earned premiums. Incurred losses and LAE were$332.1 million , or 70.6% of earned premiums, in 2019, compared to$310.2 million , or 70.5% of earned premiums, in 2018. Incurred losses and LAE as a percentage of earned premiums increased due primarily to a deterioration in the underlying loss and LAE ratio, partially offset by a favorable change in loss and LAE reserve development. Underlying losses and LAE as a percentage of related earned premiums were 70.6% in 2019, compared to 70.2% in 2018, which was a deterioration of 0.4 percentage points due primarily to the impact of business mix in 2019. Catastrophe losses and LAE (excluding reserve development) were$7.8 million in 2019, compared to$7.2 million in 2018. Favorable loss and LAE reserve development was$8.2 million in 2019, compared to$5.8 million in 2018. 43
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PREFERRED PROPERTY & CASUALTY INSURANCE (Continued) Homeowners Insurance Selected financial information for the homeowners insurance product line is presented below. DOLLARS IN MILLIONS 2020 2019 2018 Net Premiums Written$ 211.1 $ 233.1 $ 247.3 Earned Premiums$ 220.7 $ 241.3 $ 250.1 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE 108.7 131.6 131.5 Catastrophe Losses and LAE 71.2 54.0 75.2 Prior Years: Non-catastrophe Losses and LAE (2.8) (2.7) 10.4 Catastrophe Losses and LAE 0.7 (17.0) (7.2) Total Incurred Losses and LAE$ 177.8 $
165.9
Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 49.3 % 54.5 % 52.5 % Current Year Catastrophe Losses and LAE Ratio 32.3 22.4 30.1 Prior Years Non-catastrophe Losses and LAE Ratio (1.3) (1.1) 4.2 Prior Years Catastrophe Losses and LAE Ratio 0.3 (7.0) (2.9) Total Incurred Loss and LAE Ratio 80.6 %
68.8 % 83.9 %
2020 Compared with 2019 Earned premiums in homeowners insurance decreased by$20.6 million in 2020, compared to 2019, due primarily to lower volume. Incurred losses and LAE were$177.8 million , or 80.6% of earned premiums, in 2020, compared to$165.9 million , or 68.8% of earned premiums, in 2019. Incurred losses and LAE as a percentage of earned premiums increased due primarily to higher incurred catastrophe losses and LAE (excluding loss reserve development) and lower favorable catastrophe loss reserve development, partially offset by lower underlying losses and LAE as a percentage of earned premiums. Underlying losses and LAE as a percentage of earned premiums were 49.3% in 2020, compared to 54.5% in 2019, a improvement of 5.2 percentage points. Catastrophe losses and LAE (excluding reserve development) were$71.2 million in 2020, compared to$54.0 million in 2019. Favorable loss and LAE reserve development (including catastrophe loss reserve development) was$2.1 million in 2020, compared to favorable development of$19.7 million in 2019. Favorable catastrophe reserve development in 2019 included the impact of the recognition and sale of the Company's subrogation rights related to certainCalifornia wildfires that had occurred in 2017 and 2018. 2019 Compared with 2018 Earned premiums in homeowners insurance decreased by$8.8 million in 2019, compared to 2018, due primarily to lower volume. Incurred losses and LAE were$165.9 million , or 68.8% of earned premiums, in 2019, compared to$209.9 million , or 83.9% of earned premiums, in 2018. Incurred losses and LAE as a percentage of earned premiums increased due primarily to lower incurred catastrophe losses and LAE (excluding loss and LAE reserve development) and higher favorable loss and LAE reserve development, partially offset by higher underlying losses and LAE as a percentage of earned premiums. Underlying losses and LAE as a percentage of earned premiums were 54.5% in 2019, compared to 52.5% in 2018, a deterioration of 2.0 percentage points due primarily to higher severity of non-catastrophe large losses in 2019 compared to 2018. Catastrophe losses and LAE (excluding reserve development) were$54.0 million in 2019, compared to$75.2 million in 2018. Favorable loss and LAE reserve development was$19.7 million in 2019, compared to adverse development of$3.2 million in 2018. Favorable loss and LAE reserve development in 2019 included the impact of the recognition and sale of the Company's subrogation rights related to certainCalifornia wildfires that had occurred in 2017 and 2018. 44
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PREFERRED PROPERTY & CASUALTY INSURANCE (Continued) Other Personal Insurance Other personal insurance products include umbrella, dwelling fire, inland marine, earthquake, boat owners and other liability coverages. Selected financial information for other personal insurance product lines is presented below. DOLLARS IN MILLIONS 2020 2019 2018 Net Premiums Written$ 34.4 $ 37.3 $ 39.4 Earned Premiums$ 35.8 $ 38.8 $ 40.4 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE 12.3 17.7 19.1 Catastrophe Losses and LAE 6.4 1.2 4.9 Prior Years: Non-catastrophe Losses and LAE (4.2) (6.7) (4.8) Catastrophe Losses and LAE (0.2) (1.4) (0.9) Total Incurred Losses and LAE$ 14.3 $
10.8
Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 34.3 % 45.6 % 47.3 % Current Year Catastrophe Losses and LAE Ratio 17.9 3.1 12.1 Prior Years Non-catastrophe Losses and LAE Ratio (11.7) (17.3) (11.9) Prior Years Catastrophe Losses and LAE Ratio (0.6) (3.6) (2.2) Total Incurred Loss and LAE Ratio 39.9 %
27.8 % 45.3 %
2020 Compared with 2019 Earned premiums in other personal insurance decreased by$3.0 million in 2020, compared to 2019. Incurred losses and LAE were$14.3 million , or 39.9% of earned premiums, in 2020, compared to$10.8 million , or 27.8% of earned premiums, in 2019. Underlying losses and LAE as a percentage of earned premiums were 34.3% in 2020, compared to 45.6% in 2019, an improvement of 11.3 percentage points. Catastrophe losses and LAE (excluding reserve development) were$6.4 million in 2020, compared to$1.2 million in 2019. Favorable loss and LAE reserve development (including catastrophe loss reserve development) was$4.4 million in 2020, compared to$8.1 million in 2019. 2019 Compared with 2018 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$5.7 million in 2018. 45
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LIFE & HEALTH INSURANCE Selected financial information for theLife & Health Insurance segment is presented below. DOLLARS IN MILLIONS 2020 2019 2018 Earned Premiums$ 648.7 $ 643.7 $ 626.3 Net Investment Income 198.8 206.4 210.9 Other Income 0.6 8.5 4.0 Total Revenues 848.1 858.6 841.2 Policyholders' Benefits and Incurred Losses and LAE 442.0 402.7 404.2 Insurance Expenses 334.9 334.0 321.1 Operating Profit 71.2 121.9 115.9 Income Tax Expense (11.2) (23.2) (24.4) Segment Net Operating Income$ 60.0 $ 98.7 $ 91.5 INSURANCE RESERVES Dec 31, Dec 31, DOLLARS IN MILLIONS 2020 2019 Insurance Reserves: Future Policyholder Benefits$ 3,440.5 $ 3,385.3 Incurred Losses and LAE Reserves: Life 61.1 89.2 Accident and Health 25.9 27.5 Property 4.6 3.3 Total Incurred Losses and LAE Reserves 91.6 120.0 Total Insurance Reserves$ 3,532.1 $ 3,505.3 Use of Death Verification Databases 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 DeathMaster 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 endedDecember 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. See Note 2, "Summary of Accounting Policies and Accounting Changes," to the Consolidated Financial Statements under the sub-caption "Insurance Reserves" for additional discussion. 2020 Compared with 2019 Earned Premiums in theLife & Health Insurance segment increased by$5.0 million for the year endedDecember 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. Net Investment Income decreased by$7.6 million in 2020, compared to 2019, due primarily to lower yields on fixed income securities, partially offset by higher levels of investments in fixed income securities and a change in the Company's presentation of COLI income. 46
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LIFE & HEALTH INSURANCE (Continued) Other income decreased by$7.9 million in 2020, compared to 2019, due primarily to the change in presentation of COLI income. Policyholders' Benefits and Incurred Losses and LAE increased by$39.3 million in 2020, compared to 2019, due primarily to higher mortality for life insurance claims due primarily to COVID-19, and the impact of a lower reduction of the Company's estimate of the ultimate cost of using death verification databases in 2020, compared to 2019, partially offset by lower frequency of accident and health insurance claims due to COVID-19. The Company reduced its estimate of the ultimate cost of using death verification databases in its operations by$9.3 million and$21.0 million , respectively during 2020 and 2019. Insurance Expenses in theLife & Health Insurance segment increased by$0.9 million in 2020, compared to 2019. Segment Net Operating Income in theLife & Health Insurance segment was$60.0 million for the year endedDecember 31, 2020 , compared to$98.7 million in 2019. 2019 Compared with 2018 Earned Premiums in theLife & Health Insurance segment increased by$17.4 millions for the year endedDecember 31, 2019 , compared to 2018, due primarily to higher volume from accident and health insurance products offered by Reserve National, and sales volume on life insurance products. 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% atDecember 31, 2019 and 2018, respectively. Other income increased by$4.5 million in 2019, compared to 2018, due primarily to a higher level of COLI. Policyholders' Benefits and Incurred Losses and LAE decreased by$1.5 million in 2019, compared to 2018, due primarily to decrease of$21.0 million in the company's estimate of the ultimate cost of using death verification databases in the Company's operations, partially offset by higher severity on accident and health insurance claims. Insurance Expenses in theLife & Health Insurance segment increased by$12.9 million due primarily to higher commissions on increased volume within the business and investments to enhance the capabilities of the business. Segment Net Operating Income in theLife & Health Insurance segment was$98.7 million for the year endedDecember 31, 2019 , compared to$91.5 million in 2018. Life Insurance Selected financial information for the life insurance product line is presented below. DOLLARS IN MILLIONS 2020 2019 2018 Earned Premiums$ 385.7 $ 384.6 $ 378.4 Net Investment Income 193.3 198.8 202.6 Other Income - 8.1 3.5 Total Revenues 579.0 591.5 584.5 Policyholders' Benefits and Incurred Losses and LAE 318.2 270.1 279.4 Insurance Expenses 218.8 215.3 207.7 Operating Profit 42.0 106.1 97.4 Income Tax Expense (5.2) (20.0) (20.7) Total Product Line Net Operating Income$ 36.8 $
86.1
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LIFE & HEALTH INSURANCE (Continued) 2020 Compared with 2019 Earned premiums on life insurance increased by$1.1 million in 2020, compared to 2019, due primarily to higher persistency. Policyholders' benefits and incurred losses and LAE on life insurance were$318.2 million in 2020, compared to$270.1 million in 2019, an increase of$48.1 million , due primarily to higher mortality for life insurance claims primarily due to COVID-19, and the impact of a lower reduction of the Company's estimate of the ultimate cost of using death verification databases in 2020 compared to 2019. The Company reduced its estimate of the ultimate cost of using death verification databases in its operations by$9.3 million and$21.0 million , respectively during 2020 and 2019. Insurance expenses increased by$3.5 million in 2020, compared to 2019 due primarily to investments made to modernize and strengthen the distribution channel and enhance the capabilities of the business. 2019 Compared with 2018 Earned premiums on life insurance increased by$6.2 million in 2019, compared to 2018, due primarily to a higher volume of new business sales. Policyholders' benefits and incurred losses and LAE on life insurance were$270.1 million in 2019, compared to$279.4 million in 2018, a decrease of$9.3 million due primarily to adjustment of the company's estimate of the ultimate cost of using death verification databases in the company's operations. Insurance expenses increased by$7.6 million in 2019, compared to 2018 due primarily to higher commissions on increased volume and investments to enhance the capabilities of the business.Accident and Health Insurance Selected financial information for the accident and health insurance product line is presented below. DOLLARS IN MILLIONS 2020 2019 2018 Earned Premiums$ 199.3 $ 190.9 $ 177.5 Net Investment Income 5.0 6.0 6.1 Other Income 0.6 0.4 0.5 Total Revenues 204.9 197.3 184.1 Policyholders' Benefits and Incurred Losses and LAE 95.3 109.8 98.9 Insurance Expenses 91.9 88.7 82.2 Operating Profit (Loss) 17.7 (1.2) 3.0 Income Tax Expense (Benefit) (3.6) 0.3 (0.6) Total Product Line Net Operating Income (Loss)$ 14.1 $
(0.9)
2020 Compared with 2019 Earned premiums on accident and health insurance increased by$8.4 million in 2020, compared to 2019, due primarily to higher volume on accident and health insurance products and a reduction in the estimated return premium reserve for certain insurance products subject to MLR. Incurred accident and health insurance losses were$95.3 million , or 47.8% of accident and health insurance earned premiums, in 2020, compared to$109.8 million , or 57.5% of accident and health insurance earned premiums, in 2019. The decrease of 9.7 percentage points was due primarily to lower frequency of claims due to COVID-19. Insurance expenses increased by$3.2 million in 2020, compared to 2019, due primarily to premium growth and investments to enhance the capabilities of the business. 2019 Compared with 2018 Earned premiums on accident and health insurance increased by$13.4 million in 2019, compared to 2018, due primarily to higher volume of in force business. Policyholders' benefits and incurred losses and LAE on accident and health insurance were$109.8 million , or 57.5% of accident and health insurance earned premiums, in 2019, compared to$98.9 million , or 55.7% of accident and health insurance earned premiums, in 2018. The increase of 1.8% percentage points was due primarily to higher severity of claims for certain health products. Insurance expenses increased by$6.5 million in 2019, compared to 2018, due primarily to premium growth. 48
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LIFE & HEALTH INSURANCE (Continued)Property Insurance Selected financial information for the property insurance product line is presented below. DOLLARS IN MILLIONS 2020 2019 2018 Earned Premiums$ 63.7 $ 68.2 $ 70.4 Net Investment Income 0.5 1.6 2.2 Total Revenues 64.2 69.8 72.6 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE 15.2 18.1 20.5 Catastrophe Losses and LAE 12.4 3.1 4.0 Prior Years: Non-catastrophe Losses and LAE 0.4 0.8 1.3 Catastrophe Losses and LAE 0.5 0.8 0.1 Total Incurred Losses and LAE 28.5 22.8 25.9 Insurance Expenses 24.2 30.0 31.2 Operating Profit 11.5 17.0 15.5 Income Tax Expense (2.4) (3.5) (3.1) Total Product Line Net Operating Income$ 9.1 $ 13.5 $ 12.4 Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 23.8 % 26.5 % 29.2 % Current Year Catastrophe Losses and LAE Ratio 19.5 4.5 5.7 Prior Years Non-catastrophe Losses and LAE Ratio 0.6 1.2 1.8 Prior Years Catastrophe Losses and LAE Ratio 0.8 1.2 0.1 Total Incurred Loss and LAE Ratio 44.7 %
33.4 % 36.8 %
2020 Compared with 2019 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. 2019 Compared with 2018 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$1.2 million in 2019, compared to 2018, due primarily to lower volume of policies issued. 49
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INVESTMENT RESULTS Net Investment Income Net Investment Income for the years endedDecember 31, 2020 , 2019 and 2018 is presented below. DOLLARS IN MILLIONS 2020 2019 2018 Investment Income: Interest on Fixed Income Securities$ 289.8
15.4 22.9 13.6
Alternative Investments:
Equity Method Limited Liability Investments 4.9 1.0 11.0
Limited Liability Investments Included in Equity Securities 22.1 18.0 26.4
Total Alternative Investments 27.0 19.0 37.4
Short-term Investments 5.5 8.2 7.0
Loans to Policyholders 22.1 22.6 22.5
Real Estate 9.6 9.8 9.6
Other 13.2 1.5 0.9
Total Investment Income 382.6 383.4 359.9
Investment Expenses:
Real Estate 8.8 9.6 9.7
Other Investment Expenses 25.6 9.5 9.3
Total Investment Expenses 34.4 19.1 19.0
Net Investment Income $ 348.2 $ 364.3 $ 340.9
2020 Compared with 2019
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.
2019 Compared with 2018
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.
Total Comprehensive Investment Gains (Losses)
The components of Total Comprehensive Investment Gains (Losses) for the years
ended December 31, 2020 , 2019 and 2018 are presented below.
DOLLARS IN MILLIONS 2020 2019 2018
Recognized in Consolidated Statements of Income:
Income (Loss) from Change in Fair Value of Equity and
Convertible Securities $ 72.1 $ 138.9 $ (64.3)
Gains on Sales 48.3 46.9 37.6
Losses on Sales (10.2) (5.0) (11.2)
Impairment Losses (19.5) (13.8) (4.5)
90.7 167.0 (42.4)
Recognized in Other Comprehensive Income (Loss) 367.4 405.3 (235.8)
Total Comprehensive Investment Gains (Losses) $ 458.1
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INVESTMENT RESULTS (Continued) Income (Loss) From Change in Fair Value ofEquity and Convertible Securities The components of Income (Loss) from Change in Fair Value ofEquity and Convertible Securities for the years endedDecember 31, 2020 and 2019 are presented below. DOLLARS IN MILLIONS 2020 2019 Preferred Stocks$ (0.7) $ 6.2 Common Stocks (0.3) 1.9 Other Equity Interests: Exchange Traded Funds 68.0 121.0 Limited Liability Companies and Limited Partnerships 1.7 4.2 Total Other Equity Interests 69.7 125.2 Income (Loss) from Change in Fair Value of Equity Securities 68.7 133.3
Income (Loss) from Change in Fair Value of
3.4 5.6
Income (Loss) from Change in Fair Value of
Net Realized Gains on Sales of Investments The components of Net Realized Gains on Sales of Investments for the year endedDecember 31, 2020 , 2019 and 2018 are presented below. DOLLARS IN MILLIONS 2020 2019 2018 Fixed Maturities: Gains on Sales$ 40.6 $ 41.1 $ 25.3 Losses on Sales (7.9) (4.8) (11.1) Equity Securities: Gains on Sales 5.9 5.8 12.3 Losses on Sales (1.9) (0.2) -
Equity Method Limited Liability Investments:
Losses on Sales (0.4) - - Real Estate: Gains on Sales 1.8 - - Other Investments: Losses on Sales - - (0.1) Net Realized Gains on Sales of Investments$ 38.1 $ 41.9 $ 26.4 Gross Gains on Sales$ 48.3 $ 46.9 $ 37.6 Gross Losses on Sales (10.2) (5.0) (11.2)
Net Realized Gains on Sales of Investments
Fixed Maturities Net Realized Gains on Sales of Fixed Maturities for the year endedDecember 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 itsLife 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$4.4 million in connection with the repositioning. 51
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INVESTMENT RESULTS (Continued)Equity Securities Net Realized Gains on Sales ofEquity Securities for the year endedDecember 31, 2020 primarily relate to transactions whereby the Company's investments were acquired by other companies. Net Realized Gains on Sales ofEquity Securities for the year endedDecember 31, 2019 primarily relate to transactions whereby the Company's investments were acquired by other companies. Net Realized Gains on Sales ofEquity Securities for the year endedDecember 31, 2018 primarily relate to gains on dispositions of certain Investments inEquity Securities at Modified Cost resulting from transactions whereby the Company's investments were acquired by other companies. Other sales activity in 2020, 2019 and 2018 was due to normal portfolio management. Impairment Losses The Company regularly reviews its investment portfolio for factors that may indicate that a decline in the fair value of an investment has occurred from credit loss or other factors (non-credit related). Losses arising from declines in fair values are reported in the Consolidated Statements of Income in the period that the declines are evaluated. The components of Impairment Losses in the Consolidated Statements of Income for the year endedDecember 31, 2020 , 2019 and 2018 were: 2020 2019 2018 DOLLARS IN MILLIONS Amount Number of Issuers Amount Number of Issuers Amount Number of Issuers Fixed Maturities$ (16.7) 14$ (13.3) 14$ (2.0) 24 Equity Securities (2.8) 2 (0.5) 1 (2.5) 5 Impairment Losses$ (19.5) $ (13.8) $ (4.5) Fixed Maturities Impairment Losses recognized in the Consolidated Statements of Income for the year endedDecember 31, 2020 or 2019 or 2018 related primarily to investments in Fixed Maturities where the Company had the intent to sell or requirement to sell. Real Estate The Company did not recognize any impairment losses related to Investments in Real Estate in the Consolidated Statements of Income for the year endedDecember 31, 2020 or 2019 or 2018. INVESTMENT QUALITY AND CONCENTRATIONS The Company's fixed maturity investment portfolio is comprised primarily of corporate, high-grade municipal and agency bonds. AtDecember 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 ofAAA , AA, A or BBB from S&P; a rating of Aaa, Aa, A or Baa from Moody's; or a rating ofAAA , AA, A or BBB from Fitch. 52
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INVESTMENT QUALITY AND CONCENTRATIONS (Continued)
The following table summarizes the credit quality of the Company's fixed
maturity investment portfolio at
Dec 31, 2020 Dec 31, 2019
Percentage Percentage
NAIC Fair Value of Fixed Fair Value of Fixed
Rating Rating in Millions Maturities in Millions Maturities
1 AAA, AA, A $ 4,759.9 62.6 % $ 4,387.1 63.4 %
2 BBB 2,355.6 31.0 2,044.1 29.5
3-4 BB, B 353.1 4.6 319.2 4.6
5-6 CCC or Lower 137.3 1.8 171.7 2.5
Total Investments in Fixed Maturities $ 7,605.9 100.0 % $ 6,922.1 100.0 %
Gross unrealized losses on the Company's investments in below-investment-grade fixed maturities were$23.7 million and$11.7 million atDecember 31, 2020 and 2019, respectively. The following table summarizes the fair value of the Company's investments in governmental fixed maturities atDecember 31, 2020 and 2019. Dec 31, 2020 Dec 31, 2019 Percentage Percentage of Total of Total DOLLARS IN MILLIONS Fair Value Investments Fair Value InvestmentsU.S. Government and Government Agencies and Authorities$ 585.3 5.6 %$ 815.9 8.8 %
States and Political Subdivisions:
Revenue Bonds 1,153.3 11.1 958.6 10.4 States 333.5 3.2 427.5 4.6 Political Subdivisions 102.6 1.0 129.7 1.4 Foreign Governments 5.2 - 16.8 0.2
Total Investments in Governmental Fixed Maturities
20.9 %$ 2,348.5 25.4 % The following table summarizes the fair value of the Company's investments in non-governmental fixed maturities by industry atDecember 31, 2020 and 2019. Dec 31, 2020 Dec 31, 2019 Percentage Percentage of Total of Total DOLLARS IN MILLIONS Fair Value Investments Fair Value Investments Finance, Insurance and Real Estate$ 1,916.3 18.4 %$ 1,522.8 16.4 % Manufacturing 1,633.5 15.7 1,356.4 14.6 Transportation, Communication and Utilities 825.5 7.9 650.2 7.0 Services 581.3 5.6 604.4 6.5 Retail Trade 172.6 1.7 183.3 2.0 Mining 285.7 2.7 154.5 1.7 Wholesale Trade 0.5 - 72.9 0.8 Agriculture, Forestry and Fishing - - 12.4 0.1 Other 10.5 0.1 16.6 0.2 Total Investments in Non-governmental Fixed Maturities$ 5,425.9 52.1 %$ 4,573.5 49.3 % 53
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INVESTMENT QUALITY AND CONCENTRATIONS (Continued) The following table summarizes the fair value of the Company's investments in non-governmental fixed maturities by range of amount invested atDecember 31, 2020 . DOLLARS IN MILLIONS Number of Issuers Aggregate Fair Value Below$5 524 $ 1,195.3$5 -$10 217 1,535.2$10 -$20 124 1,682.1$20 -$30 28 671.8 Greater Than$30 10 341.5 Total 903 $ 5,425.9 The Company's short-term investments primarily consist ofU.S. treasury bills, money market funds and overnight interest bearing accounts. AtDecember 31, 2020 , the Company had$620.5 million invested inU.S. treasury bills,$242.1 million invested in money market funds which primarily invest inU.S. Treasury securities and$4.3 million invested in overnight interest bearing accounts with one of the Company's custodial banks. The following table summarizes the fair value of the Company's ten largest investment exposures, excluding investments inU.S. Government and Government Agencies and Authorities and Short-term Investments, atDecember 31, 2020 . Percentage Fair of Total DOLLARS IN MILLIONS Value Investments Fixed Maturities: States including their Political Subdivisions: Texas$ 140.6 1.3 % Georgia 107.9 1.0 Colorado 85.6 0.8 New York 76.1 0.7 Michigan 73.1 0.7 Louisiana 71.7 0.7 California 70.4 0.7 Pennsylvania 58.1 0.6
195.5 1.9
iShares® Core MSCI Total International Stock ETF 76.3 0.7
Total $ 955.3 9.1 %
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INVESTMENTS IN LIMITED LIABILITY COMPANIES AND LIMITED PARTNERSHIPSThe Company owns investments in various limited liability investment companies and limited partnerships that primarily invest in mezzanine debt, distressed debt, real estate and senior debt. BeginningJanuary 1, 2018 , the Company's investments in these limited liability investment companies and limited partnerships are reported either as Equity Method Limited Liability Investments at Cost Plus Cumulative Undistributed Earnings, Other Equity Interests and included inEquity Securities at Fair Value, orEquity Securities at Modified Cost depending on the accounting method used to report the investment. Additional information pertaining to these investments atDecember 31, 2020 and 2019 is presented below. Unfunded Commitment in Millions Reported Value in Millions Dec 31, Dec 31, Dec 31, Asset Class 2020 2020 2019
Reported as Equity Method Limited Liability Investments: Mezzanine Debt
22.3 28.6 16.0
Alternative Energy Partnerships 80.0 21.3 -
Distressed Debt - 14.5 22.7
Secondary Transactions 13.0 11.2 11.5
Leveraged Buyout 0.1 3.5 0.1
Growth Equity - 0.7 5.3
Real Estate - 29.9 29.9
Other - 13.1 5.6
Total Equity Method Limited Liability Investments $ 172.8 $ 225.3 $ 220.4
Reported as Other Equity Interests at Fair Value:
Mezzanine Debt 72.9 118.3 126.1
Senior Debt 18.9 33.9 39.5
Distressed Debt 24.1 31.8 16.8
Secondary Transactions 6.2 4.2 4.9
Hedge Funds - 71.6 48.2
Leveraged Buyout 7.6 30.7 4.4
Other 1.1 1.5 8.2
Total Reported as Other Equity Interests at Fair Value
$ - $ - $ 1.6
Other 0.2 15.7 18.9
Total Reported as Equity Securities at Modified Cost 0.2 15.7 20.5
Total Investments in Limited Liability Companies and Limited Partnerships
The Company expects that it will be required to fund its commitments over the
next several years. The Company expects that the proceeds from distributions
from these investments will be the primary source of funding of such
commitments.
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EXPENSES
Expenses for the year endedDecember 31, 2020 , 2019 and 2018 were: DOLLARS IN MILLIONS 2020 2019 2018 Insurance Expenses: Commissions$ 745.8 $ 708.8 $ 558.7 General Expenses 307.4 278.0 231.9 Premium Tax Expense 94.2 93.5 71.0 Total Costs Incurred 1,147.4 1,080.3 861.6 Net Policy Acquisition Costs Amortized (Deferred) (51.6) (66.9) (104.4) Amortization of Value of Business Acquired ("VOBA") 4.7 6.3 143.3 Insurance Expenses 1,100.5 1,019.7 900.5 Loss from Early Extinguishment of Debt - 5.8 - Interest Expense 36.0 42.5 43.4 Other Expenses: Acquisition Related Transaction, Integration and Other Costs 63.3 18.4 44.7 Pension Settlement Expense 64.1 - - Other 108.1 102.9 70.9 Other Expenses 235.5 121.3 115.6 Interest and Other Expenses 271.5 163.8 159.0 Total Expenses$ 1,372.0 $ 1,189.3 $ 1,059.5 Insurance Expenses Insurance Expenses increased by$80.8 million for the year endedDecember 31, 2020 , compared to 2019, due primarily to growth in business. Insurance Expenses increased by$119.2 million for the year endedDecember 31, 2019 , compared to 2018, due primarily to the inclusion of Infinity for the full twelve months in 2019 as compared to only six months in 2018, partially offset by a reduction in the amortization of VOBA. Loss on Early Extinguishment of Debt OnJune 7, 2019 , Kemper issued a notice of redemption for the entire$150.0 million aggregate principal outstanding of its 7.375% Subordinated Debentures due 2054 (the "7.375% Subordinated Debentures") at a redemption price equal to 100% of their principal, plus accrued and unpaid interest on the redemption date. OnJuly 8, 2019 , Kemper completed the redemption, and the 7.375% Subordinated Debentures were repaid in full. The Company recognized a loss on early extinguishment of debt of$5.8 million in the Consolidated Statements of Income for the year endedDecember 31, 2019 Interest and Other Expenses Interest expense decreased by$6.5 million for the year endedDecember 31, 2020 , compared to 2019, due primarily to the early extinguishment of the subordinated debenture inJune 2019 . Interest expense decreased by$0.9 million for the year endedDecember 31, 2019 , compared to 2018, due primarily to lower levels of debt outstanding. See MD&A, "Liquidity and Capital Resources," and Note 8, "Debt," to the Consolidated Financial Statements for additional discussion of debt activity. Other Expenses increased by$114.2 million for the year endedDecember 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 endedDecember 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. 56
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INCOME TAXES The Company's effective income tax rate from continuing operations differs from the Federal statutory income tax rate due primarily to (1) the effects of tax-exempt investment income and dividends received deductions, (2) nontaxable income associated with the change in cash surrender value on COLI, (3) Alternative Energy investment tax credits, (4) a permanent difference between the amount of long-term equity-based compensation expense recognized under GAAP and the amount deductible in the computation of Federal taxable income, (5) a permanent difference associated with nondeductible executive compensation, and (6) the Tax Act. Tax-exempt investment income and dividends received deductions were$19.0 million ,$20.4 million and$22.4 million for the years endedDecember 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 endedDecember 31, 2020 , 2019 and 2018, respectively. The Company realized net investment tax credits of$3.2 million for the year endedDecember 31, 2020 . The amount of expense recognized for long-term equity-based compensation expense underU.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 endedDecember 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 endedDecember 31, 2020 , 2019 and 2018, respectively. The tax benefit recorded pursuant to the Tax Act was$26.4 million for the year endedDecember 31, 2018 . See Note 16, "Income Taxes," to the Consolidated Financial Statements for additional discussion of income taxes. LIQUIDITY AND CAPITAL RESOURCES Common Stock Offering OnJune 7, 2019 , the Company completed a public offering of its common stock and issued 1,552,500 shares of common stock, at$83.00 per share. Gross proceeds from the offering were$128.9 million . Transaction costs, including the underwriting discount, were$1.7 million . InJuly 2019 , the Company used the net proceeds of$127.2 million , together with a portion of the proceeds from delayed-draw term loan facility entered into by the Company onJune 4, 2019 (the "2023 Term Loan") to redeem all$150.0 million in aggregate outstanding principal of its 7.375% Subordinated Debentures due 2054. Amended and Extended Credit Agreement and Term Loan Facility OnJune 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 toJune 8, 2023 . The term loan facility included a delayed draw feature with borrowing capacity of$250.0 million and a maturity date two years from the borrowing date (see discussion below under the heading, "Repayment of Term Loan Due 2020,"for additional information regarding the initial borrowing and subsequent repayment of this delayed-draw term loan). OnJune 4, 2019 , the Company utilized the the accordion feature under the credit agreement to increase its credit borrowing capacity by$100.0 million , resulting in the available credit commitments increasing from$300.0 million to$400.0 million . The Company incurred$0.1 million in additional debt issuance costs in connection with the utilization of the accordion feature, which in addition to the$0.9 million of remaining unamortized costs under the credit agreement, will be amortized under the remaining term of the credit agreement. There were no outstanding borrowings under the credit agreement at eitherDecember 31, 2020 orDecember 31, 2019 . Long-term Debt The Company designates debt obligations as either short-term or long-term based on maturity date at issuance. Total amortized cost of Long-term Debt outstanding atDecember 31, 2020 andDecember 31, 2019 was: Dec 31, Dec 31, (Dollars in Millions) 2020 2019 Term Loan due July 5, 2023$ 49.9 $ 49.9
5.000% Senior Notes due
448.8 448.6
2.400% Senior Notes due September 30, 2030 395.8 -
Total Long-term Debt Outstanding $ 1,172.8 $ 778.4
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LIQUIDITY AND CAPITAL RESOURCES (Continued) Term Loan Due 2023 OnJune 4, 2019 , the Company entered into the 2023 Term Loan with a borrowing capacity of$50.0 million and a maturity date four years from the borrowing date. OnJuly 5, 2019 , the Company borrowed$49.9 million , net of debt issuance costs, under the 2023 Term Loan, with a final maturity date ofJuly 5, 2023 . The agreement includes a mutual option to extend the maturity date by one year. 5.000% Senior Notes Due 2022 Infinity's liabilities at the acquisition date included$275.0 million principal amount, 5.000% Senior Notes dueSeptember 19, 2022 (the "2022 Senior Notes"). The 2022 Senior Notes were recorded at fair value as of the acquisition date,$282.1 million , with the$7.1 million premium being amortized as a reduction to interest expense over the remaining term, resulting in an effective interest rate of 4.36%. OnNovember 30, 2018 , Kemper executed a guarantee to fully and unconditionally guarantee the payment and performance obligations of the 2022 Senior Notes. 4.350% Senior Notes Due 2025 Kemper has$450.0 million aggregate principal of 4.350% senior notes dueFebruary 15, 2025 (the "2025 Senior Notes") outstanding as ofDecember 31, 2020 . Kemper initially issued$250.0 million of the notes in February of 2015 and issued an additional$200.0 million of the notes in June of 2018. The additional notes are fungible with the initial notes issued in 2015, and together are treated as part of a single series for all purposes under the indenture governing the 2025 Senior Notes. The 2025 Senior Notes are unsecured and may be redeemed in whole at any time or in part from time to time at Kemper's option at specified redemption prices. 2.400% Senior Notes Due 2030 OnSeptember 22, 2020 , Kemper offered and sold$400.0 million aggregate principal of 2.400% senior notes dueSeptember 30, 2030 ("2030 Senior Notes"). The net proceeds of issuance were$395.6 million , net of discount and transaction costs for an effective yield of 2.52%. The 2030 Senior Notes are unsecured and may be redeemed in whole at any time or in part from time to time at Kemper's option at specified redemption prices. Kemper is using the net proceeds from the issuance for general corporate purposes. Redemption of 7.375% Subordinated Debentures Due 2054 OnJune 7, 2019 , Kemper issued a notice of redemption for the entire$150.0 million aggregate principal outstanding of its 7.375% Subordinated Debentures due 2054 (the "7.375% Subordinated Debentures") at a redemption price equal to 100% of their principal, plus accrued and unpaid interest on the redemption date. OnJuly 8, 2019 , Kemper completed the redemption, and the 7.375% Subordinated Debentures were repaid in full. The Company recognized a loss on early extinguishment of debt of$5.8 million in the Consolidated Statement of Income for the year endedDecember 31, 2019 . The Company used the proceeds received from Kemper's common stock offering onJune 7, 2019 , as well as a portion of the proceeds from itsJuly 5, 2019 borrowing under the 2023 Term Loan, to repay the 7.375% Subordinated Debentures. See Note 8, "Debt," and Note 10, "Shareholders' Equity," to the Consolidated Financial Statements for additional information. Federal Home Loan Bank Agreements Kemper's subsidiaries, United Insurance,Trinity Universal Insurance Company ("Trinity") andAlliance United Insurance Company ("Alliance") are members of the FHLB ofChicago ,Dallas andSan Francisco , respectively. Alliance became a member of the FHLB ofSan Francisco inAugust 2020 . United Insurance became a member of the FHLB ofChicago inMarch 2014 . Trinity became a member of the FHLB ofDallas inDecember 2013 . Under their memberships, United,Trinity and Alliance may borrow through the advance program of their respective FHLB. As a requirement of membership in the FHLB, United Insurance,Trinity and Alliance must maintain certain levels of investment in FHLB common stock and additional amounts based on the level of outstanding borrowings. The Company's investments in FHLB common stock are reported at cost and included inEquity Securities at Modified Cost. The carrying value of FHLB ofChicago common stock was$11.8 million and$4.9 million atDecember 31, 2020 andDecember 31, 2019 , respectively. The carrying value of FHLB ofDallas common stock was$3.4 million and$3.3 million atDecember 31, 2020 andDecember 31, 2019 , respectively. The carrying value of FHLB ofSan Francisco common stock was$1.7 million atDecember 31, 2020 . The Company periodically uses short-term FHLB borrowings for a combination of cash management and risk management purposes, in addition to long-term FHLB 58
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LIQUIDITY AND CAPITAL RESOURCES (Continued) borrowings for spread lending purposes. During 2020, United Insurance received advances of$466.4 million from the FHLB ofChicago and made repayments of$302.0 million under the spread lending program. United Insurance had outstanding advances from the FHLB ofChicago totaling$407.8 million atDecember 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 ofChicago with a fair value of$530.5 million atDecember 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. Common Stock Repurchases OnMay 6, 2020 , Kemper's Board of Directors authorized the repurchase of up to an additional$200 million of Kemper common stock, in addition to the$243.7 million remaining under the previous authorization as ofDecember 31, 2019 . As ofDecember 31, 2020 , the remaining share repurchase authorization was$333.3 million under the repurchase program. During the year endedDecember 31, 2020 , Kemper repurchased and retired 1.6 million shares of its common stock in open market transactions under its share repurchase authorization for an aggregate cost of$110.4 million and average cost per share of$68.29 . Kemper did not repurchase any of its common stock in open market transactions in 2019 or 2018. Dividends to Shareholders 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 endedDecember 31, 2020 and 2019, respectively. Subsidiary Dividends and Capital Contributions Various state insurance laws restrict the ability of Kemper's insurance subsidiaries to pay dividends without regulatory approval. Such insurance laws generally restrict the amount of dividends paid in an annual period to the greater of statutory net income from the previous year or 10% of statutory capital and surplus. Kemper's direct insurance subsidiaries collectively paid$322.0 million ,$239.0 million and$130.4 million in dividends to Kemper in 2020, 2019 and 2018, respectively. In 2021, Kemper estimates that its direct insurance subsidiaries would be able to pay approximately$402.8 million in dividends to Kemper without prior regulatory approval. Kemper made capital contributions to insurance subsidiaries of$62 million and$83 million during 2020 and 2019, respectively. Sources and Uses of Funds Kemper directly held cash and investments totaling$733.2 million atDecember 31, 2020 , compared to$206.8 million atDecember 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 ofChicago ,Dallas andSan 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 ofChicago ,Dallas andSan Francisco . 59
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LIQUIDITY AND CAPITAL RESOURCES (Continued)
Generally, there is a time lag between when premiums are collected and when policyholder benefits and insurance claims are paid. During periods of growth, property and casualty insurance companies typically experience positive operating cash flows and are able to invest a portion of their operating cash flows to fund future policyholder benefits and claims. During periods in which premium revenues decline, insurance companies may experience negative cash flows from operations and may need to sell investments to fund payments to policyholders and claimants. In addition, if the Company's property and casualty insurance subsidiaries experience several significant catastrophic events over a relatively short period of time, investments may have to be sold in advance of their maturity dates to fund payments, which could result in either investment gains or losses. Management believes that its property and casualty insurance subsidiaries maintain adequate levels of liquidity in the event that they were to experience several future catastrophic events over a relatively short period of time. Net Cash Provided by Operating Activities decreased by$86.3 million for the year endedDecember 31, 2020 , compared to 2019. Net Cash Provided by Operating Activities decreased by$4.9 million for the year endedDecember 31, 2019 , compared to 2018. Net Cash Provided by Financing Activities was$378.3 million for the year endedDecember 31, 2020 , compared to net cash provided of$160.8 million for the same period in 2019. Net proceeds from Policyholder Obligations provided$162.2 million of cash for the year endedDecember 31, 2020 compared to$232.2 million for the year endedDecember 31, 2019 . Kemper issued no common stock during the year endedDecember 31, 2020 . Net proceeds from borrowing under the term loan facilities provided$395.6 million of cash for the year endedDecember 31, 2020 , compared to$49.9 million for the year endedDecember 31, 2019 . Kemper used$185.0 million of cash to repay long-term debt for the year endedDecember 31, 2019 . Kemper did not repay long-term debt during 2020. Kemper used$110.4 million of cash to repurchase shares of its common stock during 2020. Kemper did not use any cash to repurchase shares of its common stock during 2019. Kemper used$78.9 million of cash to pay dividends for the year endedDecember 31, 2020 , compared to$67.8 million of cash used to pay dividends in the same period of 2019. The quarterly dividend rate was$0.30 for each quarter of 2020. The quarterly dividend rate was$0.25 per common share for the first three quarters of 2019 and$0.28 for the fourth quarter of 2019. Net Cash Provided by Financing Activities was$160.8 million for the year endedDecember 31, 2019 , compared to net cash used of$12.2 million for the same period in 2018. Net proceeds from the issuance of long-term debt, which was used to fund the acquisition of Infinity, provided$49.9 million of cash for the year endedDecember 31, 2019 . Kemper used$185.0 million of cash to repay long-term debt for the year endedDecember 31, 2019 . Kemper did not use any cash during 2019 or 2018 to repurchase shares of its common stock. Kemper used$67.8 million of cash to pay dividends for the year endedDecember 31, 2019 , compared to$56.4 million of cash used to pay dividends in the same period of 2018. The quarterly dividend rate was$0.25 per common share for the first three quarters of 2019 and$0.28 for the fourth quarter of 2019. The quarterly dividend rate was$0.24 for each quarter of 2018. Cash available for investment activities in total is dependent on cash flow from Operating Activities and Financing Activities and the level of cash the Company elects to maintain.Net Cash Used by Investing Activities was$757.0 million for the year endedDecember 31, 2020 , compared to$633.4 million in 2019. Net cash used to acquire short-term investments was$390.8 million for the year endedDecember 31, 2020 , compared to net cash used to acquire short-term investments of$176.0 million in 2019. Fixed Maturities investing activities used net cash of$320.9 million for the year endedDecember 31, 2020 , compared to net cash used of$55.8 million in 2019.Equity Securities investing activities provided net cash of$115.3 million for the year endedDecember 31, 2020 , compared to net cash used of$89.7 million in 2019. Equity Method Limited Liability Investments investing activities used net cash of$0.8 million for the year endedDecember 31, 2020 , compared to$44.2 million in 2019.Net Cash Used by Investing Activities was$633.4 million for the year endedDecember 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 endedDecember 31, 2019 , compared to$52.7 million in 2018. Fixed Maturities investing activities provided net cash of$55.8 million for the year endedDecember 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 endedDecember 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 endedDecember 31, 2019 , compared to providing net cash of$29.0 million in 2018. 60
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CONTRACTUAL OBLIGATIONS Estimated cash disbursements pertaining to the Company's contractual obligations atDecember 31, 2020 are presented below. Jan 1, 2021 to Jan 1, 2022 to Jan 1, 2024 to After Dec 31, DOLLARS IN MILLIONS Dec 31, 2021 Dec 31, 2023 Dec 31, 2025 2025 Total Long Term Debt Obligations $ -$ 325.0 $ 450.0 $ 400.0 $ 1,175.0 Finance Lease Obligations 0.2 - - - 0.2 Operating Lease Obligations 20.8 37.3 21.5 24.2 103.8 Purchase Obligations 14.0 7.7 4.6 - 26.3 Life and Health Insurance Policy Benefits 311.3 501.9 479.1 6,924.6 8,216.9Property and Casualty Insurance Reserves 1,397.5 460.6 89.3 35.1 1,982.5 Other Contractual Obligations Reflected in Long Term Liabilities on the Consolidated Balance Sheet under GAAP 50.0 79.0 44.6 48.3 221.9 Total Contractual Obligations$ 1,793.8 $
1,411.5
Amounts included in Life and Health Insurance Policy Benefits within the contractual obligations table above represent the estimated cash payments to be made to policyholders and beneficiaries. Such cash outflows are based on the Company's current assumptions for mortality, morbidity and policy lapse, but are undiscounted with respect to interest. Policies must remain in force for the policyholder or beneficiary to receive the benefit under the policy. Depending on the terms of a particular policy, future premiums from the policyholder may be required for the policy to remain in force. The Company estimates that future cash inflows would total$4.2 billion using the same assumptions used to estimate the cash outflows. The Company's Life Insurance Reserves in the Company's Consolidated Balance Sheets are generally based on the historical assumptions for mortality and policy lapse rates and are on a discounted basis. Accordingly, the sum of the amounts presented above for Life and Health Insurance Policy Benefits significantly exceeds the amount of Life and Health Insurance Reserves reported on the Company's Consolidated Balance Sheet atDecember 31, 2020 . In addition to the purchase obligations included above, the Company had certain investment commitments totaling$303.8 million atDecember 31, 2020 . The funding of such investment commitments is dependent on a number of factors, the timing of which is indeterminate. The Company cannot make a reasonably reliable estimate of the amount and period of related future payments, if any, for such liability. Other Contractual Obligations Reflected in Long Term Liabilities on the Consolidated Balance Sheets under GAAP primarily consist of interest obligations related to Long Term Debt Obligations. CRITICAL ACCOUNTING ESTIMATES Kemper's subsidiaries conduct their operations in two industries: property and casualty insurance and life and health insurance. Accordingly, the Company is subject to several industry-specific accounting principles under GAAP. The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The process of estimation is inherently uncertain. Accordingly, actual results could ultimately differ materially from the estimated amounts reported in a company's financial statements. Different assumptions are likely to result in different estimates of reported amounts. The Company's critical accounting policies most sensitive to estimates include the valuation of investments, the valuation of reserves for property and casualty insurance incurred losses and LAE, the assessment of recoverability of goodwill and the valuation of pension benefit obligations. Valuation of Investments The reported value of the Company's investments was$10,424.1 million atDecember 31, 2020 , of which$8,504.3 million , or 82%, was reported at fair value,$225.3 million , or 2%, was reported under the equity method of accounting,$297.9 million or 3%, was reported at unpaid principal balance and$1,396.6 million , or 13%, was reported at cost, modified cost or depreciated cost. Investments, in general, are exposed to various risks, such as interest rate risk, credit risk and overall market volatility risk. Accordingly, it is reasonably possible that changes in the fair values of the Company's investments reported at fair value will occur in the near term and such changes could materially affect the amounts reported in the financial statements. Also, it is reasonably possible that changes in the carrying values of the Company's Equity Method Limited Liability Investments will occur in the near term and such changes could materially affect the amounts reported in the financial statements because these issuers follow specialized industry accounting rules which require that they report all of their investments at fair value (See Item 61
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CRITICAL ACCOUNTING ESTIMATES (Continued) 1A., "Risk Factors" under the title "The Company's investment portfolio is exposed to a variety of risks that may negatively impact net investment income and cause realized and unrealized losses"). As more fully described under the heading, "Fair Value Measurements," in Note 2, "Summary of Accounting Policies and Accounting Changes," to the Consolidated Financial Statements, the Company uses a hierarchical framework which prioritizes and ranks the market observability used in fair value measurements. The fair value of the Company's investments measured and reported at fair value was$8,504.3 million atDecember 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 atDecember 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 asConvertible Securities . Accordingly, both the reported and fair values of the Company's investments inConvertible Securities accounted for under the fair value option method of accounting were$39.9 million atDecember 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 atDecember 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 atDecember 31, 2020 . Equity securities with readily determinable fair values are recorded asEquity 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 inEquity Securities at Fair Value were$858.5 million atDecember 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 ofEquity 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. Had the Company elected the fair value option for all of its investments in financial instruments, the Company's reported net income for the year endedDecember 31, 2020 , would have increased by$292.3 million . The Company regularly reviews its fixed maturity investment portfolio and holdings inEquity 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. 62
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CRITICAL ACCOUNTING ESTIMATES (Continued) Such reviews are inherently uncertain in that the value of the investment may not fully recover or may decline further in future periods. Some factors considered in evaluating whether or not a decline in fair value of an investment exist include, but are not limited to, the following:Fixed Maturity Securities •The financial condition, credit rating and prospects of the issuer; •The length of time and magnitude of the unrealized loss; •The ability of the issuer to make scheduled principal and interest payments; •The volatility of the investment;Equity Securities at Modified Cost •Opinions of the Company's external investment managers; •The financial condition and prospects of the issuer; •Current market conditions; •Changes in credit ratings; and •Changes in the regulatory environment. Changes in these factors from theirDecember 31, 2020 evaluation date could result in the Company determining that a decline in the fair value exists for an investment held and evaluated atDecember 31, 2020 . Such determination would result in an impairment loss in the period such determination is made. Property and Casualty Insurance Reserves for Losses and Loss Adjustment ExpensesThe 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$1,969.8 million of gross loss and LAE reserves atDecember 31, 2020 and 2019, respectively. Property and Casualty Insurance Reserves for the Company's business segments atDecember 31, 2020 and 2019 were: DOLLARS IN MILLIONS 2020
2019
Business Segments: Specialty Property & Casualty Insurance$ 1,544.8 $
1,551.0
Preferred Property & Casualty Insurance 411.6 388.5 Life & Health Insurance 4.6 3.3 Total Business Segments 1,961.0 1,942.8 Unallocated Reserves 21.5 27.0
Total Property and Casualty Insurance Reserves
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:
•Incurred Loss Development Methodology;
•Paid Loss Development Methodology;
•Bornhuetter-Ferguson Incurred Loss Methodology;
•Bornhuetter-Ferguson Paid Loss Methodology; and
•Frequency and Severity Methodology.
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CRITICAL ACCOUNTING ESTIMATES (Continued)
The Company's actuaries generally review the results of at least four of the
estimation methodologies, two based on paid data and two based on incurred data,
to initially estimate the ultimate losses and LAE for the current accident
quarter or year and re-estimate the ultimate losses and LAE for previous
accident quarters or years to determine if changes in the previous estimates of
the ultimate losses and LAE are indicated by the most recent data. In some
cases, the methodologies produce a cluster of estimates with a tight band of
indicated possible outcomes. In other cases, however, the methodologies produce
conflicting results and wider bands of indicated possible outcomes, and the
Company's actuaries perform additional analyses before making their final
selections. However, such bands do not necessarily constitute a range of
outcomes, nor does the Company's management or the Company's actuaries calculate
a range of outcomes.
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.
In estimating reserves, the Company's actuaries exercise professional judgment
and must consider, and are influenced by, many variables that are difficult to
quantify, such as:
•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;
•Changes in underwriting practices;
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CRITICAL ACCOUNTING ESTIMATES (Continued)
•Changes in the mix of business by state, class and policy limit within product line; •Growth in new lines of business; •Changes in the attachment points of the Company's reinsurance programs; •Medical costs, including, but not limited to, the ability to assess the extent of injuries and the impact of inflation; •Repair costs, including, but not limited to, the impact of inflation and the availability of labor and materials; •Changes in the judicial environment, including, but not limited to, the interpretation of policy provisions, the impact of jury awards and changes in case law; and •Changes in state regulatory requirements. A change in any one or more of the foregoing factors is likely to result in a projected ultimate net loss and LAE that is different from the previously estimated reserve and/or previous frequency and severity trends. Such changes in estimates may be material. For example, the Company's actuaries review frequency (number of claims per policy or exposure), severity (dollars of loss per claim) and average premium (dollars of premium per exposure). Actual frequency and severity experienced will vary depending on changes in mix by class of insured risk. Similarly, the actual frequency and rate of recovery from reinsurance will vary depending on changes in the attachment point for reinsurance. In particular, in periods of high growth or expansion into new markets, there may be additional uncertainty in estimating the ultimate losses and LAE. The contributing factors of this potential risk are changes in the Company's mix by policy limit and mix of business by state or jurisdiction. Actuaries use historical experience and trends as predictors of how losses and LAE will emerge over time. However, historical experience may not necessarily be indicative of how actual losses and LAE will emerge. Changes in case reserve adequacy, changes in minimum case reserves and changes in internal claims handling procedures could impact the timing and recognition of incurred claims and produce an estimate that is either too high or too low if not adjusted for by the actuary. For example, if, due to changes in claims handling procedures, actual claims are settled more rapidly than they were settled historically, the estimate produced by the paid loss development methodology would tend to be overstated if the actuary did not identify and adjust for the impact of the changes in claims handling procedures. Similarly, if, due to changes in claims handling procedures, actual claim reserves are set at levels higher than past experience, the estimate produced by the incurred loss development methodology would tend to be overstated if the actuary did not identify and adjust for the impact of the changes in claims handling procedures. The final step in the quarterly loss and LAE reserving process involves a comprehensive review of the actuarial indications by the Company's chief actuary and corporate management who apply their collective judgment and determine the appropriate estimated level of reserves to record. Numerous factors are considered in this determination process, including, but not limited to, the assessed reliability of key loss trends and assumptions that may be significantly influencing the current actuarial indications, changes in claim handling practices or other changes that affect the timing of payment or development patterns, changes in the mix of business, the maturity of the accident quarter or year, pertinent trends observed over the recent past, the level of volatility within a particular line of business, the improvement or deterioration of actuarial indications in the current period as compared to prior periods, and the amount of reserves related to third party pools for which the Company does not have access to the underlying data and, accordingly, relies on calculations provided by such pools. Estimated Variability of Property and Casualty Insurance ReservesThe Company's goal is to ensure that its total reserves for property and casualty insurance losses and LAE are adequate to cover all costs, while sustaining minimal variation from the time reserves for losses and LAE are initially estimated until losses and LAE are fully paid. Changes in the Company's estimates of these losses and LAE over time, also referred to as "development," will occur and may be material. Favorable development is recognized and reported in the Consolidated Financial Statements when the Company decreases its previous estimate of ultimate losses and LAE and results in an increase in net income in the period recognized, whereas adverse development is recognized and reported in the Consolidated Financial Statements when the Company increases its previous estimate of ultimate losses and LAE and results in a decrease in net income. Although development will emerge in all of the Company's product lines, development in the Company's specialty personal automobile insurance product line could have the most significant impact due to the relative size of its loss and LAE reserves. To further illustrate the sensitivity of the Company's reserves for specialty personal automobile insurance losses and LAE, the Company measures the standard deviation of the mean reserve estimate using a bootstrapping methodology. The Company 65
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CRITICAL ACCOUNTING ESTIMATES (Continued) 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 atDecember 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." Goodwill Recoverability 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 ofOctober 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 onJanuary 1, 2017 . Based on its qualitative assessment, the Company concluded that the associated goodwill was recoverable for each reporting unit tested. Pension Benefit Obligations The process of estimating the Company's pension benefit obligations and pension benefit costs is inherently uncertain and the actual cost of benefits may vary materially from the estimates recorded. These liabilities are particularly volatile due to their long-term nature and are based on several assumptions. The main assumptions used in the valuation of the Company's pension benefit obligations and pension costs are: •Estimated mortality of the participants and beneficiaries eligible for benefits; •Estimated expected long-term rates of returns on investments; and •Estimated rate used to discount the expected benefit payment to a present value. A change in any one or more of these assumptions is likely to result in a projected benefit obligation or pension cost that differs from the actuarial estimates atDecember 31, 2020 . Such changes in estimates may be material. OFF-BALANCE SHEET ARRANGEMENTS The Company has no material obligations under guarantee contracts. The Company has no material retained or contingent interests in assets transferred to an unconsolidated entity. The Company has no material obligations, including contingent obligations, under contracts that would be accounted for as derivative instruments. The Company has no obligations, including contingent obligations, arising out of a variable interest in an unconsolidated entity held by, and material to, the Company, where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with the Company. Accordingly, the Company has no material off-balance sheet arrangements. 66
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Except for rules and interpretive releases of theSEC under authority of federal securities laws and a limited number of grandfathered standards, the FASB Accounting Standards Codification ("ASC") is the sole source of authoritative GAAP recognized by theFinancial Accounting Standards Board ("FASB") that is applicable to the Company. The FASB issues ASUs to amend the authoritative literature in ASC. The Company has adopted all recently issued accounting pronouncements with effective dates prior toJanuary 1, 2020 . See Note 2, "Summary of Accounting Policies and Accounting Changes" to the Consolidated Financial Statements for discussion on adoption of these ASUs and impacts to the Company's financial statements, which were not material. For all recently issued accounting pronouncements with effective dates afterDecember 31, 2020 , the Company does not expect adoption to have a material impact on its financial statements, with the possible exception of ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to Accounting for Long-Duration Contracts. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Quantitative Information About Market Risk The Company's consolidated balance sheets include three types of financial instruments subject to the material market risk disclosures required by theSEC : 1.Investments in Fixed Maturities; 2.Investments inEquity Securities at Fair Value; and 3.Debt. Investments in Fixed Maturities and Debt are subject to material interest rate risk. The Company's Investments inEquity Securities include common and preferred stocks and hedge funds and, accordingly, are subject to material equity price risk and interest rate risk. For purposes of this disclosure, market risk sensitive financial instruments are divided into two categories: financial instruments acquired for trading purposes and financial instruments acquired for purposes other than trading. The Company's market risk sensitive financial instruments are generally classified as held for purposes other than trading. The Company has no significant holdings of financial instruments acquired for trading purposes. The Company has no significant holdings of derivatives. The Company measures its sensitivity to market risk by evaluating the change in its financial assets and liabilities relative to fluctuations in interest rates and equity prices. The evaluation is made using instantaneous changes in interest rates and equity prices on a static balance sheet to determine the effect such changes would have on the Company's market value at risk and the resulting pre-tax effect on Shareholders' Equity. The changes chosen represent the Company's view of adverse changes which are reasonably possible over a one-year period. The selection of the changes chosen should not be construed as the Company's prediction of future market events, but rather an illustration of the impact of such possible events. For the interest rate sensitivity analysis presented below, the Company assumed an adverse and instantaneous increase of 100 basis points in the yield curve at bothDecember 31, 2020 and 2019 for Investments in Fixed Maturities. Such 100 basis point increase in the yield curve may not necessarily result in a corresponding 100 basis point increase in the interest rate for all investments in fixed maturities. For example, a 100 basis point increase in the yield curve for risk-free, taxable investments in fixed maturities may not result in a 100 basis point increase for tax-exempt investments in fixed maturities. For Investments in Fixed Maturities, the Company also anticipated changes in cash flows due to changes in the likelihood that investments would be called or prepaid prior to their contractual maturity. All other variables were held constant. For preferred stock equity securities, the Company assumed an adverse and instantaneous increase of 100 basis points in market interest rates from their levels at bothDecember 31, 2020 and 2019. All other variables were held constant. For Debt, the Company assumed an adverse and instantaneous decrease of 100 basis points in market interest rates from their levels atDecember 31, 2020 and 2019. All other variables were held constant. The Company measured equity price sensitivity assuming an adverse and instantaneous 30% decrease in the Standard and Poor's Stock Index (the "S&P 500") from its level atDecember 31, 2020 and 2019, with all other variables held constant. The Company's investments inEquity Securities at Fair Value were correlated with the S&P 500 using the portfolio's weighted-average beta of 0.73 and 0.99 atDecember 31, 2020 and 2019, respectively. Beta measures a stock's relative volatility in relation to the rest of the stock market, with the S&P 500 having a beta coefficient of 1.00.The Equity Securities a Fair Value portfolio's weighted-average beta was calculated using each security's assumed forward looking betas based on underlying investment characteristics weighted by the fair value of such securities as ofDecember 31, 2020 .The Equity Securities at Fair Value portfolio's weighted-average beta was calculated using each security's beta for the five-year 67 -------------------------------------------------------------------------------- QUANTITATIVE INFORMATION ABOUT MARKET RISK (Continued) periods endedDecember 31, 2019 , and weighted on the fair value of such securities atDecember 31, 2019 , respectively. For equity securities without observable market inputs, the Company assumed a beta of 1.00 atDecember 31, 2019 .
The estimated adverse effects on the fair value of the Company's financial
instruments at
Pro Forma Increase (Decrease)
Interest Equity Total
DOLLARS IN MILLIONS Fair Value Rate Risk Price Risk Market Risk
ASSETS
Investments in Fixed Maturities $ 7,605.9 $ (576.0) $ - $ (576.0)
Investments in Equity Securities 858.5 (2.5) (173.4) (175.9)
LIABILITIES
Debt $ 1,247.8 $ 41.2 $ - $ 41.2 The estimated adverse effects on the fair value of the Company's financial
instruments at
Pro Forma Increase (Decrease)
Interest Equity Total
DOLLARS IN MILLIONS Fair Value Rate Risk Price Risk Market Risk
ASSETS
Investments in Fixed Maturities $ 6,922.1 $ (489.1) $ - $ (489.1)
Investments in Equity Securities 907.3 (40.2) (175.1) (215.3)
LIABILITIES
Debt $ 820.2 $ 29.2 $ - $ 29.2
The market risk sensitivity analysis assumes that the composition of the
Company's interest rate sensitive assets and liabilities, including, but not
limited to, credit quality, and the equity price sensitive assets existing at
the beginning of the period remains constant over the period being measured. It
also assumes that a particular change in interest rates is uniform across the
yield curve regardless of the time to maturity. Interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
interest rates. Also, any future correlation, either in the near term or the
long term, between the Company's common stock equity securities and fair value
option portfolios and the S&P 500 may differ from the historical correlation as
represented by the weighted-average historical beta of the common stock equity
securities and fair value option portfolios. Accordingly, the market risk
sensitivity analysis may not be indicative of, is not intended to provide, and
does not provide, a precise forecast of the effect of changes of market rates on
the Company's income or shareholders' equity. Further, the computations do not
contemplate any actions the Company may undertake in response to changes in
interest rates or equity prices.
To the extent that any adverse 100 basis point change occurs in increments over
a period of time instead of instantaneously, the adverse impact on fair values
would be partially mitigated because some of the underlying financial
instruments would have matured. For example, proceeds from any maturing assets
could be reinvested and any new liabilities would be incurred at the then
current interest rates.
Qualitative Information About Market Risk
Market risk is a broad term related to economic losses due to adverse changes in
the fair value of a financial instrument and is inherent to all financial
instruments. SEC disclosure rules focus on only one element of market risk-price
risk. Price risk relates to changes in the level of prices due to changes in
interest rates, equity prices, foreign exchange rates or other factors that
relate to market volatility of the rate, index, or price underlying the
financial instrument. The Company's primary market risk exposures are to changes
in interest rates and equity prices.
The Company manages its interest rate exposures with respect to Investments in
Fixed Maturities by investing primarily in investment-grade securities of
moderate effective duration.
68
--------------------------------------------------------------------------------Item 8. Financial Statements and Supplementary Data
Index to the Consolidated Financial Statements of
Kemper Corporation and Subsidiaries
Consolidated Statements of Income for the Years Ended
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended
71
Consolidated Balance Sheets at December 31, 2020 and 2019 72
Consolidated Statements of Cash Flows for the Years Ended
73
Consolidated Statements of Shareholders' Equity for the Years Ended
74
Notes to the Consolidated Financial Statements
Note 1-Basis of Presentation and Significant Estimates 75 Note 2-Summary of Accounting Policies and Accounting Changes 75 Note 3-Acquisition of Business 82 Note 4-Investments 84 Note 5-Goodwill and Intangible Assets 87 Note 6-Property and Casualty Insurance Reserves 88 Note 7-Policyholder Obligations 99 Note 8-Debt 100 Note 9-Leases 102 Note 10-Shareholders' Equity 103 Note 11-Long-term Equity-based Compensation 104 Note 12-Income from Continuing Operations per Unrestricted Share 109
Note 13-Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income 110
Note 14-Income from Investments 112
Note 15-Insurance Expenses 113
Note 16-Income Taxes 114
Note 17-Pension Benefits 116
Note 18-Postretirement Benefits Other Than Pensions 120
Note 19-Business Segments 122
Note 20-Catastrophe Reinsurance 124
Note 21-Other Reinsurance 127
Note 22-Fair Value Measurements 127
Note 23-Contingencies 132
Note 24-Related Parties 133
Note 25-Quarterly Financial Information (Unaudited) 134
Report of Independent Registered Public Accounting Firm 136
69
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KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31,
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS 2020 2019 2018
Revenues:
Earned Premiums $ 4,672.2 $ 4,472.4 $ 3,384.4
Net Investment Income 348.2 364.3 340.9
Other Income 94.6 35.5 42.2
Income (Loss) from Change in Fair Value of
72.1 138.9 (64.3)
Net Realized Gains on Sales of Investments 38.1 41.9 26.4
Other-than-temporary Impairment Losses:
Total Other-than-temporary Impairment Losses (19.5) (13.7) (4.5)
Portion of Gains (Losses) Recognized in Other Comprehensive Income
- (0.1) -
Impairment Losses (19.5) (13.8) (4.5)
Total Revenues 5,205.7 5,039.2 3,725.1
Expenses:
Policyholders' Benefits and Incurred Losses and Loss Adjustment
Expenses 3,323.6 3,188.3 2,466.5
Insurance Expenses 1,100.5 1,019.7 900.5
Loss from Early Extinguishment of Debt - 5.8 -
Interest and Other Expenses 271.5 163.8 159.0
Total Expenses 4,695.6 4,377.6 3,526.0
Income from Continuing Operations before Income Taxes 510.1 661.6 199.1
Income Tax Expense (100.2) (130.5) (10.7)
Income from Continuing Operations 409.9 531.1 188.4
Income from Discontinued Operations - - 1.7
Net Income $ 409.9 $ 531.1 $ 190.1 Income from Continuing Operations Per Unrestricted Share: Basic
$ 6.24 $ 8.04 $ 3.22 Diluted$ 6.14 $ 7.96 $ 3.19 Net Income Per Unrestricted Share: Basic$ 6.24 $ 8.04 $ 3.25 Diluted$ 6.14 $ 7.96 $ 3.22
The Notes to the Consolidated Financial Statements are an integral part of these
financial statements.
70
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KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For The Years Ended December 31,
DOLLARS IN MILLIONS 2020 2019 2018
Net Income $ 409.9 $ 531.1 $ 190.1 Other Comprehensive Income (Loss) Before Income Taxes:
Changes in Net Unrealized Holding Gains (Losses) on
369.9 405.3 (236.1)
Credit Losses Recognized in Consolidated Statements of Income
(2.6) - -
Foreign Currency Translation Adjustments - - 0.3
Decrease (Increase) in Net Unrecognized Postretirement Benefit Costs
70.2 (7.8) (6.9)
Gain (Loss) on Cash Flow Hedges 0.4 0.4 1.2
Other Comprehensive Income (Loss) Before Income Taxes 437.9 397.9 (241.5)
Other Comprehensive Income Tax Benefit (Expense) (93.5) (83.6) 50.7
Other Comprehensive Income (Loss) 344.4 314.3 (190.8)
Total Comprehensive Income (Loss) $
754.3
The Notes to the Consolidated Financial Statements are an integral part of these
financial statements.
71
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KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS 2020 2019
Assets:
Investments:
Fixed Maturities at Fair Value (Amortized Cost: 2020 -
858.5 907.3
Equity Securities at Modified Cost 40.1 41.9
Equity Method Limited Liability Investments 225.3 220.4
Convertible Securities at Fair Value 39.9 37.3
Short-term Investments at Cost which Approximates Fair Value 875.4 470.9
Other Investments 779.0 661.5
Total Investments 10,424.1 9,261.4
Cash 206.1 136.8
Receivables from Policyholders (Allowance for Credit Losses: 2020 -
1,194.5 1,117.1
Other Receivables 222.4 219.7
Deferred Policy Acquisition Costs 589.3 537.7
Goodwill 1,114.0 1,114.0
Current Income Tax Assets 15.6 44.7
Other Assets 575.9 557.7
Total Assets $ 14,341.9 $ 12,989.1
Liabilities and Shareholders' Equity:
Insurance Reserves:
Life and Health $ 3,527.5 $ 3,502.0
Property and Casualty 1,982.5 1,969.8
Total Insurance Reserves 5,510.0 5,471.8
Unearned Premiums 1,615.1 1,545.5
Policyholder Obligations 467.0 309.8
Deferred Income Tax Liabilities 285.7 178.2
Accrued Expenses and Other Liabilities 727.9 733.1
Long-term Debt, Current and Non-current, at Amortized Cost (Fair
Value: 2020 -
1,172.8 778.4
Total Liabilities 9,778.5 9,016.8
Shareholders' Equity:
Common Stock, $0.10 Par Value Per Share, 100,000,000 Shares
Authorized; 65,436,207 Shares Issued and Outstanding at December
31, 2020 and 66,665,888 Shares Issued and Outstanding at
December 31, 2019 6.5 6.7
Paid-in Capital 1,805.2 1,819.2
Retained Earnings 2,071.2 1,810.3
Accumulated Other Comprehensive Income 680.5 336.1
Total Shareholders' Equity 4,563.4 3,972.3
Total Liabilities and Shareholders' Equity $
14,341.9
The Notes to the Consolidated Financial Statements are an integral part of these
financial statements.
72
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KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31,
DOLLARS IN MILLIONS 2020 2019 2018
Cash Flows from Operating Activities:
Net Income $ 409.9 $ 531.1 $ 190.1
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Net Realized Investment (Gains) Losses (38.1) (41.9) (26.4)
Impairment Losses 19.5 13.8 4.5
Depreciation and Amortization of Property, Equipment and Software
36.2 32.8 15.6
Amortization of Intangibles Assets Acquired 18.8 29.7 156.3
Settlement Costs Related to Defined Benefit Pension Plan 64.1 - -
Contribution to Defined Benefit Pension Plan - (55.3) (5.1)
Loss from Early Extinguishment of Debt - 5.8 -
Change in Accumulated Undistributed Earnings of Equity Method Limited Liability Investments
(4.0) 10.9 2.9
Decrease (Increase) in Value of
(72.1) (138.9) 64.3
Changes in:
Receivables from Policyholders (77.4) (110.1) (57.6)
Reinsurance Recoverables 16.8 35.6 (46.7)
Deferred Policy Acquisition Costs (52.3) (66.9) (104.6)
Insurance Reserves 38.3 102.3 183.2
Unearned Premiums 69.6 121.2 54.7
Income Taxes 46.5 58.8 13.1
Other Assets and Liabilities (27.8) 5.4 94.9
Net Cash Provided by Operating Activities 448.0 534.3 539.2
Cash Flows from Investing Activities: Proceeds from Sales, Calls and Maturities of Fixed Maturities 972.4
1,229.1 2,643.3
Proceeds from the Sales or Paydowns of Investments:
Equity Securities 434.4 217.3 351.9 Real Estate Investments 5.4 - - Mortgage Loans 25.5 17.2 - Other Investments 45.2 29.5 14.1 Purchases of Investments: Fixed Maturities (1,293.3) (1,284.9) (2,413.2) Equity Securities (319.1) (307.0) (478.5) Real Estate Investments (0.5) (1.4) (1.5) Corporate-owned Life Insurance (100.0) (150.0) - Mortgage Loans (52.7) (44.5) - Other Investments (43.5) (73.8) (45.1) Net Sales (Purchases) of Short-term Investments (390.8) (176.0) 52.7 Acquisition of Business, Net of Cash Acquired - - (560.6) Acquisition of Software and Long-lived Assets (53.4) (84.0) (65.3) Other 13.4 (4.9) 4.6 Net Cash Provided by (Used in) Investing Activities (757.0) (633.4) (497.6) Cash Flows from Financing Activities: Net Proceeds from Issuance of Long-term Debt 395.6 49.9 249.4 Repayment of Long-term Debt - (185.0) (215.0) Proceeds from Policyholder Obligations 467.0 615.8 11.4 Repayment of Policyholder Obligations (304.8) (383.6) (2.5)
Proceeds from Issuance of Common Stock, Net of Transaction Costs
- 127.5 -
Proceeds from Shares Issued under Employee Stock Purchase Plan 4.4
1.6 -
Common Stock Repurchases (110.4) - -
Dividends and Dividend Equivalents Paid (78.9) (67.8) (56.4)
Other 5.4 2.4 0.9
Net Cash Provided by (Used in) Financing Activities 378.3 160.8 (12.2)
Increase in Cash 69.3 61.7 29.4
Cash, Beginning of Year 136.8 75.1 45.7
Cash, End of Period $ 206.1 $ 136.8 $ 75.1 The Notes to the Consolidated Financial Statements are an integral part of these
financial statements.
73
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KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2020 , 2019 and 2018
Accumulated
Other Total
DOLLARS AND SHARES IN MILLIONS, Number of Common Paid-in Retained Comprehensive Shareholders' EXCEPT PER SHARE AMOUNTS Shares Stock Capital Earnings Income (Loss) Equity BALANCE, DECEMBER 31, 2017 51.5$ 5.1 $ 673.1 $ 1,243.0 $ 194.4 $ 2,115.6 Cumulative Effect of Adoption of New Accounting Standard - - - (18.2) 18.2
-
BALANCE, JANUARY 1, 2018 As Adjusted 51.5 5.1 673.1 1,224.8 212.6$ 2,115.6 Net Income - - - 190.1 - 190.1 Other Comprehensive Income (Loss), Net of Taxes (Note 13) - - - - (190.8)
(190.8)
Cash Dividends and Dividend Equivalents to Shareholders ($0.96 per share) - - - (56.4) -
(56.4)
Issuances of Common Stock (Note 3) 13.1 1.4 977.2 - -
978.6
Equity-based Compensation Cost (Note 11) - - 18.6 - -
18.6
Equity-based Awards, Net of Shares Exchanged (Note 11) 0.1 - (2.6) (3.0) -
(5.6)
BALANCE, DECEMBER 31, 2018 64.7 6.5 1,666.3 1,355.5 21.8 3,050.1 Net Income - - - 531.1 - 531.1 Other Comprehensive Income (Loss), Net of Taxes (Note 13) - - - - 314.3
314.3
Cash Dividends and Dividend Equivalents to Shareholders ($1.03 per share) - - - (68.4) -
(68.4)
Issuances of Common Stock (Note 3) 1.6 0.2 127.0 - -
127.2
Shares Issued Under Employee Stock Purchase Plan (Note 10) - - 1.9 - -
1.9
Equity-based Compensation Cost (Note 11) - - 25.3 - -
25.3
Equity-based Awards, Net of Shares Exchanged (Note 11) 0.4 - (1.3) (7.9) -
(9.2)
BALANCE, DECEMBER 31, 2019 66.7 6.7 1,819.2 1,810.3 336.1 3,972.3 Net Income - - - 409.9 - 409.9 Other Comprehensive Income (Loss), Net of Taxes (Note 13) - - - - 344.4
344.4
Cash Dividends and Dividend Equivalents to Shareholders ($1.20 per share) - - - (79.4) -
(79.4)
Repurchase of Common Stock (Note 10) (1.6) (0.2) (44.2) (66.0) -
(110.4)
Shares Issued Under Employee Stock Purchase Plan (Note 10) - - 4.4 - -
4.4
Equity-based Compensation Cost (Note 11) - - 24.9 - -
24.9
Equity-based Awards, Net of Shares Exchanged (Note 11) 0.3 - 0.9 (3.6) -
(2.7)
BALANCE, DECEMBER 31, 2020 65.4$ 6.5
The Notes to the Consolidated Financial Statements are an integral part of these
financial statements.
74--------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ESTIMATES The Consolidated Financial Statements included the accounts ofKemper 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 inthe United States ("GAAP"). All significant intercompany accounts and transactions have been eliminated. Periodically, Kemper may acquire an additional company which then becomes one of the various subsidiaries of Kemper. When an acquisition occurs, Kemper will include the results of the acquired company in the consolidated financial results from the date of its acquisition and forward. Certain prior year amounts for company-owned life insurance ("COLI") have been reclassified from Other Assets to Other Investments to conform to the current presentation. Certain prior year amounts in the Consolidated Statements of Cash Flows have been reclassified to conform to the current presentation. Use of Estimates 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 fair values of the Company's Investments in Fixed Maturities, Investments inConvertible Securities at Fair Value, Investments inEquity Securities at Fair Value and Debt are estimated using a hierarchical framework which prioritizes and ranks market price observability. The carrying amounts reported in the Consolidated Balance Sheets approximate fair value for Cash, Short-term Investments and certain other assets and other liabilities because of their short-term nature. The actual value at which financial instruments could be sold or settled with a willing buyer or seller may differ from estimated fair values depending on a number of factors, including, but not limited to, current and future economic conditions, the quantity sold or settled, the presence of an active market and the availability of a willing buyer or seller. 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. The process of determining whether an asset is impaired or recoverable relies on projections of future cash flows, operating results and market conditions. Projections are inherently uncertain, and, accordingly, actual future cash flows may differ materially from projected cash flows. As a result, the Company's assessment of the impairment of long-lived assets is susceptible to the risk inherent in making such projections. NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES Investments Investments in Fixed Maturities include bonds, notes and redeemable preferred stocks. Investments in Fixed Maturities are classified as available for sale and reported at fair value. Net Investment Income, including amortization of purchased premiums and accretion of market discounts, on Investments in Fixed Maturities is recognized as interest over the period that it is earned using the effective yield method. Unrealized appreciation or depreciation, net of applicable deferred income taxes, on fixed maturities classified as available for sale is reported in Accumulated Other Comprehensive Income ("AOCI") included in Shareholders' Equity. Investments inConvertible Securities include fixed maturities with equity conversion features. The Company has elected the fair value option method of accounting for investments inConvertible Securities and recordsConvertible Securities at fair value 75 --------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued) on the Consolidated Balance Sheets. Changes in fair value ofConvertible Securities are recorded in the Consolidated Statements of Income during the period such changes occur. Equity investments include common stocks, non-redeemable preferred stocks, exchange traded funds, money market mutual funds and limited liability companies and investment partnerships in which the Company's interests are deemed minor. Equity investments with readily determinable fair values are recorded asEquity Securities at Fair Value on the Consolidated Balance Sheets. EffectiveJanuary 1, 2018 , changes in the fair value of such equity securities are reported in the Consolidated Statements of Income. Prior toJanuary 1, 2018 , changes in the fair values of such equity securities were reported in AOCI. Dividend income on investments in common and non-redeemable preferred stocks is recognized on the ex-dividend date. The Company holds certain equity investments without readily determinable fair values at cost, less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer on the Consolidated Balance Sheets asEquity Securities at Modified Cost. Changes in the carrying value of Modified Cost investments due to observable price changes are recorded as Income (Loss) from Change in Fair Value ofEquity and Convertible Securities . Equity Method Limited Liability Investments include investments in limited liability investment companies and limited partnerships in which the Company's interests are not deemed minor and are accounted for under the equity method of accounting whereby changes in net asset values are recorded in Net Investment Income in the Consolidated Statements of Income. Certain partnerships for which results are not available on a timely basis are reported on a lag. 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 andU.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. Short-term Investments include certificates of deposit and other fixed maturities that mature within one year from the date of purchase,U.S. Treasury bills, money market mutual funds and overnight interest-bearing accounts. Short-term Investments are reported at cost, which approximates fair value. 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. The following accounting policy has been updated effectiveJanuary 1, 2020 to reflect the Company's adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments as described above. Investments in Fixed Maturities - Allowance for Expected Credit Losses For fixed maturity investments that the Company intends to sell or for which it is more likely than not that the Company will be required to sell before an anticipated recovery of value, the full amount of the impairment is reported in Impairment Losses. The Company writes down the investment's amortized cost to its fair value, and will not adjust for any subsequent recoveries. For fixed maturity investments that the Company does not intend to sell or for which it is more likely than not that the Company will not be required to sell before an anticipated recovery of value, the Company will evaluate whether a decline in fair value below the amortized cost basis has occurred from a credit loss or other factors (non-credit related). Considerations in 76 --------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements
NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued)
the credit loss assessment include (1) extent to which the fair value has been less than amortized cost, (2) conditions related to the security, an industry, or a geographic area, (3) payment structure of the investment and the likelihood of the issuer's ability 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. Any increase or decrease in the expected allowance for credit losses related to investments is recognized in Impairment Losses. The expected allowance for credit losses is limited by the amount that the fair value is less than the amortized cost basis and is adjusted for any additional expected credit losses or subsequent recoveries. The amortized cost basis of the investment is not adjusted for the expected allowance for credit loss. The impairment related to other factors (non-credit related) is reported in Other Comprehensive Income, net of applicable taxes. 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. Fair Value Measurements The Company uses a hierarchical framework which prioritizes and ranks the market observability of inputs used in fair value measurements. Market price observability is affected by a number of factors, including the type of asset or liability and the characteristics specific to the asset or liability being measured. Assets and liabilities with 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 used in measuring fair value. The Company classifies the inputs used to measure fair value into one of three levels as follows: •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 •Level 3 - Significant unobservable inputs for the asset or liability being measured. Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company's market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those cases, the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level of input that is significant to the entire measurement. Such determination requires significant management judgment. Deferred Policy Acquisition Costs Costs directly associated with the successful acquisition of business, principally commissions and certain premium taxes and policy issuance costs, are deferred. Costs deferred on property and casualty insurance contracts and short duration health insurance contracts are amortized over the period in which premiums are earned. Costs deferred on traditional life insurance products and other long-duration insurance contracts are primarily amortized over the anticipated premium-paying period of the related policies in proportion to the ratio of the annual premiums to the total premiums anticipated, which is estimated using the same assumptions used in calculating policy reserves.Goodwill The cost of an acquired entity over the fair value of net assets acquired is reported asGoodwill .Goodwill is not amortized, but rather is tested for recoverability annually or when certain triggering events require testing. Insurance Reserves Reserves for losses and LAE on property and casualty insurance coverage and health insurance coverage represent the estimated claim cost and loss adjustment expense necessary to cover the ultimate net cost of investigating and settling all losses incurred and unpaid at the end of any given accounting period. Such estimates are based on individual case estimates for reported claims and estimates for incurred but not reported ("IBNR") losses, including expected development on reported 77 --------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued) 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. For traditional life insurance products, the reserves for future policy benefits are estimated on the net level premium method using assumptions as of the issue date for mortality, interest, policy lapses and expenses, including provisions for adverse deviations. These assumptions vary by such characteristics as plan, age at issue and policy duration. Mortality assumptions are based on the Company's historical experience and industry standards. Interest rate assumptions principally range from 3% to 7%. Lapse rate assumptions are based on actual and industry experience. Insurance Reserves for life insurance products are comprised of reserves for future policy benefits plus an estimate of the Company's liability for unpaid life insurance claims and claims adjustment expenses, which includes an estimate for IBNR life insurance claims. Prior to 2016, except when required by applicable law, the Company did not utilize the database of reported deaths maintained by theSocial Security Administration or any other comparable database (a "DeathMaster File " or "DMF") in its operations, including to determine its IBNR liability for life insurance products. Instead of using such a database, the Company calculated its IBNR liability for life insurance products using Company-specific historical information, which included analyzing average paid claims and the average lag between date of death and the date reported to the Company for claims for which proof of death had been provided. In 2016, the Company initiated a voluntary enhancement of its claims handling procedures for its life insurance policies. The Company is now utilizing a DMF to identify potential situations where the Company has yet to be notified of an insured's death and, as appropriate, initiating an outreach process to identify and contact beneficiaries and settle claims. Policyholders' Benefits and Incurred Losses and Loss Adjustment Expenses for the year endedDecember 31, 2016 included a charge of$77.8 million to recognize the initial impact of using a DMF in the Company's operations, including to determine its IBNR liability for unpaid claims and claims adjustment expenses for life insurance products. Policyholder Obligations Policyholder Obligations includeFederal Home Loan Bank ("FHLB") funding agreements used for spread lending purposes and universal life-type policyholder contracts and are stated at account balances. The following accounting policy has been updated effectiveJanuary 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. Receivables from Policyholders - Allowance for Expected Credit Losses 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. Management estimates the allowance using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience on the receivables from policyholders provide the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current environmental conditions, primarily unemployment rates that could impact an insured's ability to pay premiums. Other Receivables Other Receivables primarily include reinsurance recoverables and accrued investment income. Reinsurance Recoverables were$50.1 million and$122.6 million atDecember 31, 2020 and 2019, respectively. Accrued Investment Income was$77.1 million and$78.7 million atDecember 31, 2020 and 2019, respectively. Other Assets Other Assets primarily include property and equipment, internal use software, right-of-use assets, insurance licenses acquired in business combinations, the value of other intangible assets acquired and prepaid expenses. Property and equipment is depreciated over the useful lives of the assets, generally using the straight-line or double declining balance methods of 78 --------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued) depreciation depending on the asset involved. Internal use software is amortized over the useful life of the asset using the straight-line method of amortization and is evaluated for recoverability upon identification of impairment indicators. Insurance licenses acquired in business combinations and other indefinite life intangibles are not amortized, but rather tested periodically for recoverability. The Company accounts for the value of business acquired ("VOBA") based on actuarial estimates of the present value of future cash flows embedded in insurance in force as of an acquisition date. VOBA was$20.3 million and$24.1 million atDecember 31, 2020 and 2019, respectively. VOBA is amortized over the expected profit emergence period of the policies in force as of the acquisition date. The Company evaluates VOBA assets for recoverability annually. The Company accounts for the future profits embedded in customer relationships ("Customer Relationships") acquired based on the present value of estimated future cash flows from such relationships. Customer Relationships was$3.4 million and$4.3 million atDecember 31, 2020 and 2019, respectively, and are amortized on a straight-line basis over the estimated useful life of the relationship. Customer Relationships are tested for recoverability using undiscounted projections of future cash flows and written down to estimated fair value if the carrying value exceeds the sum of such projections of undiscounted cash flows. The Company accounts for the present value of the future profits embedded in broker or agent relationships acquired ("Agent Relationships") based on the present value of estimated future cash flows from such acquired relationships or, using the cost recovery method, which estimates the ultimate cost to build a comparable distribution network. Agent Relationships was$57.6 million and$62.5 million atDecember 31, 2020 and 2019, respectively, and are amortized on a straight-line basis over the estimated useful life of the relationship. Agent Relationships are tested for recoverability using undiscounted projections of future cash flows and written down to estimated fair value if the carrying value exceeds the sum of such projections of undiscounted cash flows. Accrued Expenses and Other Liabilities 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. Recognition of Earned Premiums and Related Expenses 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, namelySpecialty Property & Casualty Insurance andPreferred 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. Traditional life insurance premiums are recognized as revenue when due. Policyholders' benefits are associated with related premiums to result in recognition of profits over the periods for which the benefits are provided using the net level premium method. Policyholders' Benefits and Incurred Losses and Loss Adjustment Expenses include provisions for future policy benefits under life and certain accident and health insurance contracts and provisions for reported claims, estimates for IBNR claims and loss adjustment expenses. Benefit payments in excess of policy account balances are expensed. 79 --------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued) Reinsurance 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. Gains related to long-duration reinsurance contracts are deferred and amortized over the life of the underlying reinsured policies. Losses related to long-duration reinsurance contracts are recognized immediately. Any gain or loss associated with reinsurance agreements for which Kemper's insurance subsidiaries have been legally relieved of their obligations to the policyholder is recognized in the period of relief. Income Taxes 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. The Company reports a liability for unrecognized tax benefits, if any, resulting from uncertain tax positions taken, or expected to be taken, in an income tax return, if any. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense. Discontinued Operations In 2008, the Company sold itsUnitrin 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. Adoption of New Accounting Guidance Accounting Standards Adopted in 2020 InJune 2016 , theFinancial 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 effectiveJanuary 1, 2020 , which resulted in no cumulative-effect adjustment to retained earnings. 80 --------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued) InJanuary 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 afterDecember 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. InApril 2019 , the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. ASU 2019-04 clarifies certain aspects of accounting for credit losses, hedging activities, and financial instruments, previously addressed by ASU 2016-13, Measurement of Credit Losses on Financial Instruments, ASU 2017-12, Targeted Improvements to Derivatives and Hedging Activities, and ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The Company adopted ASU 2017-12 in the first quarter of 2019. Accordingly, the amendments in ASU 2019-04 related to clarifications on accounting for hedging activities are effective for the Company in the first quarter of 2020. The amendments of ASU 2019-04 related to ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, and ASU 2016-13, Measurement of Credit Losses on Financial Instruments, are effective for annual periods beginning afterDecember 15, 2019 , and interim periods within those annual periods. The initial adoption of ASU 2019-04 did not have a material effect on the Company's Consolidated Financial Statements and Notes to the Consolidated Financial Statements. InMay 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 afterDecember 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. Accounting Standards Not Yet Adopted InAugust 2018 , the FASB issued ASU 2018-12,Financial Services-Insurance (Topic 944): Targeted Improvements to Accounting for Long-Duration Contracts. ASU 2018-12 amends the accounting model for certain long-duration insurance contracts and requires the insurer to provide additional disclosures in annual and interim reporting periods. In November 2020, the FASB issued ASU 2020-11 which deferred the effective date of ASU 2018-12 by one year for public business entities. ASU 2018-12 is now effective for fiscal years beginning after December 15, 2022, and interim periods within those annual periods. The amendments in ASU 2018-12 (i) require cash flow assumptions used to measure the liability for future policy benefits for nonparticipating traditional and limited pay long duration contracts to be updated at least annually with the recognition and remeasurement recorded in net income, (ii) simplify the amortization of deferred acquisition costs to be amortized on a constant level basis over the expected term of the contract, (iii) require all market risk benefits to be measured at fair value, and (iv) enhance certain presentation and disclosure requirements which include disaggregated rollforwards for liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities, deferred acquisition costs, and information about significant inputs, judgements and methods used in the measurement. The Company plans to adopt using the modified retrospective transition method and is currently evaluating the impact of this guidance on its financial statements. 81
--------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued) In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to simplify accounting for income taxes by eliminating certain exceptions to the guidance in ASC Topic 740, Income Taxes, related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. Further, ASU 2019-12 clarifies that single-member limited liability companies and similar disregarded entities that are not subject to income tax are not required to recognize an allocation of consolidated income tax expense in their separate financial statements, but they could elect to do so. ASU 2019-12 is effective for annual periods beginning after December 15, 2020 and interim periods within those annual periods. The adoption of this guidance is not expected to have a material impact on the Company's Consolidated Financial Statements. The Company will continue to evaluate the impact of this guidance on its financial statements. In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues), which clarifies the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. ASU 2020-01 is effective for annual periods beginning after December 15, 2020 and interim periods within those annual periods. The adoption of this guidance is not expected to have a material impact on the Company's Consolidated Financial Statements. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The guidance in ASU 2020-04, if elected, shall apply to contract modifications if the terms that are modified directly replace, or have the potential to replace, a reference rate with another interest rate index. If other terms are contemporaneously modified in a manner that changes, or has the potential to change, the amount or timing of contractual cash flows, the guidance in ASU 2020-04 shall apply only if those modifications are related to the replacement of a reference rate. ASU 2020-04 is effective for contract modifications made between March 12, 2020 through December 31, 2022. The adoption of the new guidance did not have an impact on the Company's Consolidated Financial Statements. The Company will continue to evaluate the impact of this guidance on its financial statements. In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs, which clarifies that an entity should re-evaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. ASU 2020-08 is effective for annual periods beginning after December 15, 2020 and interim periods within those annual periods. The adoption of this guidance is not expected to have a material impact on the Company's Consolidated Financial Statements. The Company has adopted all other recently issued accounting pronouncements with effective dates prior to January 1, 2020. There were no adoptions of such accounting pronouncements during the year ended December 31, 2020 that had a material impact on the Company's Consolidated Financial Statements. NOTE 3. ACQUISITION OF BUSINESS Acquisition of American Access Casualty Company 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.
AAC, headquartered in
82--------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 3. ACQUISITION OF BUSINESS (Continued) Acquisition ofInfinity Property and Casualty Corporation On July 2, 2018, Kemper acquired 100% of the outstanding common stock ofInfinity 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 ofDallas and FHLB ofChicago . 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. In 2019, the Company completed the process of estimating the fair value of assets acquired and liabilities assumed. In accordance with ASC Topic 805, Business Combinations, changes to the preliminary estimates and allocation as a result of events or conditions as of the acquisition date, are reported in the Company's financial statements as an adjustment to the assets acquired and liabilities assumed. The Company finalized its estimate of certain legal and tax accruals, increasing liabilities assumed by $1.8 million, increasing current income tax assets by $0.2 million and increasing goodwill by $1.6 million compared with balances as of December 31, 2018. The Company has allocated all of the goodwill associated with the Infinity acquisition to the Specialty Property & Casualty Insurance segment. The factors that contributed to the recognition of goodwill include synergies from economies of scale within the underwriting and claims operations, acquiring a talented workforce and cost savings opportunities. Based on the Company's final allocation of the purchase price, the fair value of the assets acquired and liabilities assumed were: DOLLARS IN MILLIONS Investments $
1,569.3
Short-term Investments at Cost which Approximates Fair Value Investments
98.8
Cash
4.0
Receivables from Policyholders
583.4
Other Receivables
31.7
Value of Intangible Assets Acquired (Reported in Other Assets) 262.7 Current Income Tax Assets 1.0 Goodwill1 791.0 Other Assets 102.1 Property and Casualty Insurance Reserves (717.2) Unearned Premiums (715.6) Debt (282.1) Deferred Income Tax Liabilities
(10.8)
Accrued Expenses and Other Liabilities (169.6) Total Purchase Price $ 1,548.7
1Non-deductible for tax-purposes.
83
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 4. INVESTMENTS
Fixed Maturities
The amortized cost and estimated fair values of the Company's Investments in
Fixed Maturities at December 31, 2020 were:
Gross Unrealized Allowance for
Amortized Expected Credit
DOLLARS IN MILLIONS Cost Gains Losses Losses Fair Value
U.S. Government and Government Agencies and
Authorities $ 536.5 $ 48.9 $ (0.1) $ - $ 585.3
States and Political Subdivisions 1,404.3 185.4 (0.2) - 1,589.5
Foreign Governments 6.6 - (1.1) (0.3) 5.2
Corporate Securities:
Bonds and Notes 3,749.5 689.5 (10.6) (3.0) 4,425.4
Redeemable Preferred Stocks 7.0 0.5 - - 7.5
Collateralized Loan Obligations 785.1 2.3 (19.7) - 767.7
Other Mortgage- and Asset-backed 203.7 21.6 - - 225.3
Investments in Fixed Maturities $ 6,692.7 $ 948.2 $ (31.7) $ (3.3) $ 7,605.9
The amortized cost and estimated fair values of the Company's Investments in Fixed Maturities at December 31, 2019 were:
Amortized Gross Unrealized
DOLLARS IN MILLIONS Cost Gains Losses Fair Value
U.S. Government and Government Agencies and
Authorities $ 784.7 $ 32.5 $ (1.3) $ 815.9
States and Political Subdivisions 1,386.4 130.5 (1.1) 1,515.8
Foreign Governments 17.2 1.2 (1.6) 16.8
Corporate Securities:
Bonds and Notes 3,465.0 401.8 (7.1) 3,859.7
Redeemable Preferred Stocks 6.8 - (0.1) 6.7
Collateralized Loan Obligations 624.6 2.1 (8.5) 618.2
Other Mortgage- and Asset-backed 88.0 2.1 (1.1) 89.0
Investments in Fixed Maturities $ 6,372.7 $ 570.2 $ (20.8) $ 6,922.1
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: DOLLARS IN MILLIONS Amortized Cost Fair Value Due in One Year or Less $ 98.6 $ 101.3 Due after One Year to Five Years 1,107.3 1,182.9 Due after Five Years to Ten Years 1,525.1 1,720.0 Due after Ten Years 2,567.8 3,177.7
Mortgage- and Asset-backed Securities Not Due at a Single Maturity Date
1,393.9 1,424.0
Investments in Fixed Maturities $ 6,692.7 $ 7,605.9
The expected maturities of the Company's Investments in Fixed Maturities may
differ from the contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
84
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 4. INVESTMENTS (Continued)
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.
Less Than 12 Months 12 Months or Longer Total
Fair Unrealized Fair Unrealized Fair Unrealized
DOLLARS IN MILLIONS Value Losses Value Losses Value Losses
Fixed Maturities:
U.S. Government and Government
Agencies and Authorities $ 10.5 $ (0.1) $ - $ - $ 10.5 $ (0.1)
States and Political Subdivisions 23.3 (0.2) - - 23.3 (0.2)
Foreign Governments 0.5 (0.1) 2.6 (1.0) 3.1 (1.1)
Corporate Securities:
Bonds and Notes 132.9 (7.5) 46.1 (3.1) 179.0 (10.6)
Collateralized Loan Obligations 145.2 (3.8) 371.4 (15.9) 516.6 (19.7)
Other Mortgage- and Asset-backed 6.3 - - - 6.3 -
Total Fixed Maturities $ 318.7 $ (11.7) $ 420.1 $ (20.0) $ 738.8 $ (31.7)
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 $8.0 million and
below-investment-grade fixed maturity investments comprised $23.7 million of the
unrealized losses on investments in fixed maturities at December 31, 2020. For
below-investment-grade fixed maturity investments in an unrealized loss
position, the unrealized loss amount, on average, was approximately 11% of the
amortized cost basis of the investment.
An aging of unrealized losses on the Company's Investments in Fixed Maturities
at December 31, 2019 is presented below.
Less Than 12 Months 12 Months or Longer Total
Fair Unrealized Fair Unrealized Fair Unrealized
DOLLARS IN MILLIONS Value Losses Value Losses Value Losses
Fixed Maturities:
U.S. Government and Government
Agencies and Authorities $ 118.5 $ (1.3) $ 5.1 $ - $ 123.6 $ (1.3)
States and Political Subdivisions 63.0 (0.7) 5.4 (0.4) 68.4 (1.1)
Foreign Governments 1.0 (0.3) 3.1 (1.3) 4.1 (1.6)
Corporate Securities:
Bonds and Notes 160.0 (2.1) 70.7 (5.0) 230.7 (7.1)
Redeemable Preferred Stocks 5.5 (0.1) - - 5.5 (0.1)
Collateralized Loan Obligations 95.5 (1.9) 355.6 (6.6) 451.1 (8.5)
Other Mortgage- and Asset-backed 72.8 (1.1) - - 72.8 (1.1)
Total Fixed Maturities $ 516.3 $ (7.5) $ 439.9 $ (13.3) $ 956.2 $ (20.8)
85--------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 4. INVESTMENTS (Continued) Based on the Company's evaluation at December 31, 2019 of the prospects of the issuers, including, but not limited to, the credit ratings of the issuers of the investments in the fixed maturities, and the Company's intention to not sell and its determination that it would not be required to sell before recovery of the amortized cost of such investments, the Company concluded that the declines in the fair values of the Company's investments in fixed maturities presented in the preceding table were temporary at the evaluation date. 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." Fixed Maturities - Impairment Losses The following table sets forth the change in allowance for credit losses on fixed maturities available-for-sale by major security type for the year ended December 31, 2020. Foreign Corporate Bonds (Dollars in Millions) Governments and Notes Total Allowance for Credit Losses at Beginning of the Year $ - $ - $ - Impact of Adopting ASU 2016-13 - - -
Additions for Securities for which No Previous Expected Credit Losses were Recognized
1.2 5.9 7.1
Reduction Due to Sales (0.7) (1.3) (2.0)
Net Increase (Decrease) in Allowance on Previously Impaired Securities
(0.2) (0.2) (0.4)
Write-offs Charged Against Allowance - (1.4) (1.4)
Allowance for Credit Losses at End of Period $ 0.3 $ 3.0 $ 3.3
Equity Securities
Equity Securities at Fair Value
Equity securities with readily-determinable fair values, including equity
securities which the Company previously classified as Fair Value Option
Investments, are classified as Equity Securities at Fair Value in the
Consolidated Balance Sheets with changes in fair value recorded as Income from
Change in Fair Value of Equity and Convertible Securities in the Consolidated
Statements of Income. Net unrealized gains arising during the year-ended
December 31, 2020 and recognized in earnings, related to such investments still
held as of December 31, 2020 were $136.6 million.
Equity Securities at Modified Cost
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
86
--------------------------------------------------------------------------------
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 4. INVESTMENTS (Continued)
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.
Equity Method Limited Liability Investments
Equity Method Limited Liability Investments include investments in limited
liability investment companies and limited partnerships in which the Company's
interests are not deemed minor and are accounted for under the equity method of
accounting. The HLBV equity method of accounting is used for the Company's
investments in Alternative Energy Partnerships. The Company's investments in
Equity Method Limited Liability Investments are generally of a passive nature in
that the Company does not take an active role in the management of the
investment entity.
In 2020 and 2019, aggregate investment income (losses) from Equity Method
Limited Liability Investments exceeded 10% of the Company's pretax consolidated
net income. Accordingly, the Company is disclosing aggregated summarized
financial data for its Equity Method Limited Liability Investments for all
periods presented in the Consolidated Financial Statements. Such aggregated
summarized financial data does not represent the Company's proportionate share
of the Equity Method Limited Liability Investment assets or earnings. Aggregate
total assets of the Equity Method Limited Liability Investments in which the
Company invested totaled $3,554.5 million, $2,368.1 million and $2,805.3
million, as of December 31, 2020, 2019 and 2018, respectively. Aggregate total
liabilities of the Equity Method Limited Liability Investments in which the
Company invested totaled $1,602.5 million, $817.2 million and $1,030.7 million,
as of December 31, 2020, 2019 and 2018, respectively. Aggregate net income of
the Equity Method Limited Liability Investments in which the Company invested
totaled $74.9 million, $78.0 million and $130.4 million for the years ended
December 31, 2020, 2019 and 2018, respectively. The aggregate summarized
financial data is based on the most recent and sufficiently-timely financial
information available to the Company as of the respective reporting dates and
periods. The Company's maximum exposure to loss at December 31, 2020 is limited
to the total carrying value of $225.3 million. In addition, the Company had
outstanding commitments totaling approximately $172.8 million to fund Equity
Method Limited Liability Investments at December 31, 2020. At December 31, 2020,
4.4% of Equity Method Limited Liability Investments were reported without a
reporting lag. 8.0% of the total carrying value were reported with a one month
lag and the remainder were reported with more than a one month lag.
Other Investments
The carrying values of the Company's Other Investments at December 31, 2020 and
2019 were:
DOLLARS IN MILLIONS 2020 2019
Company-owned Life Insurance $ 327.4 $ 217.0
Loans to Policyholders at Unpaid Principal 297.9 305.6 Real Estate at Depreciated Cost
98.7 111.4
Mortgage Loans and Other 55.0 27.5
Total $ 779.0 $ 661.5
NOTE 5. GOODWILL AND INTANGIBLE ASSETS Goodwill balances by business segment at December 31, 2020 and 2019 were: DOLLARS IN MILLIONS
2020 2019
Specialty Property & Casualty Insurance $ 845.0 $ 845.0 Preferred Property & Casualty Insurance
49.6 49.6
Life & Health Insurance 219.4 219.4
Total $ 1,114.0 $ 1,114.0
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.
87
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 5. GOODWILL AND INTANGIBLE ASSETS (Continued) The Gross carrying amount and accumulated amortization of Definite and Indefinite life intangible assets at December 31, 2020 and 2019 were:
2020 2019
Gross Gross
Carrying Accumulated Carrying Accumulated
(Dollars in Millions) Amount Amortization Net Amount Amount Amortization Net Amount
Definite Life Intangibles
Value of Business Acquired $ 194.5 $ 174.2 $ 20.3 $ 194.5 $ 170.4
$ 24.1
Customer Relationships 39.0 35.6 3.4 39.0 34.7 4.3
Agent Relationships 74.4 16.8 57.6 74.4 11.9 62.5
Internal-Use Software 299.6 108.6 191.0 261.6 71.9 189.7
Total Definite Life Intangible
Assets 607.5 335.2 272.3 569.5 288.9 280.6
Indefinite Life Intangible Assets
Trade Names 5.2 - 5.2 5.2 - 5.2
Insurance Licenses 42.6 - 42.6 42.6 - 42.6
Total Indefinite Life Intangible
Assets 47.8 - 47.8 47.8 - 47.8
Total Intangible Assets $ 655.3 $ 335.2 $ 320.1 $ 617.3 $ 288.9 $ 328.4
The Company records intangible assets acquired in business combinations and
certain costs incurred developing and customizing internal-use software within
Other Assets on the Consolidated Balance Sheets. Definite life intangible assets
are amortized over the estimated profit emergence period or estimated useful
life of the asset. Indefinite life intangible assets are not amortized, but
rather tested annually for impairment. In 2020 and 2019, the Company recognized
amortization expense on definite life intangible assets of $42.3 million and
$37.8 million, respectively.
The amount of amortization expense expected to be recorded in the next five
years for definite life intangible assets is as follows:
DOLLARS IN MILLIONS 2021 2022 2023 2024 2025
Definite Life Intangible Assets:
Value of Business Acquired $ 3.4 $ 1.9 $ 1.9 $ 1.8 $ 1.8
Customer Relationships 0.7 0.6 0.5 0.4 0.4
Agent Relationships 5.0 5.0 5.0 5.0 5.0
Internal-Use Software 24.8 25.6 22.8 19.4 15.4
Total $ 33.9 $ 33.1 $ 30.2 $ 26.6 $ 22.6
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES
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. Such estimates are based on individual case estimates for reported claims
and estimates for IBNR losses, including expected development on reported
claims.
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 estimate ultimate losses and LAE and, therefore,
reserves at least quarterly for most product lines and/or coverage levels using
accident quarters or years spanning 10 or more years, depending on the size of
the product line
88
--------------------------------------------------------------------------------
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)
and/or coverage level or emerging issues relating to them. The Company's
actuaries use a variety of generally accepted actuarial loss reserving
estimation methodologies to estimate the ultimate losses and LAE for the current
accident quarter or year and re-estimate the ultimate losses and LAE for
previous accident quarters or years to determine if changes in the previous
estimates of the ultimate losses and LAE are indicated by the most recent data.
The 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
generally results in the historical development factors becoming less reliable
over time in predicting how losses and LAE will ultimately develop. The
Company's actuaries use professional judgment in determining 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. In
some cases, the Company's actuaries make adjustments to the loss reserving
estimation methodologies to estimate ultimate losses and LAE.
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 following tables contain information about incurred and paid claims
development as of and for the year ended December 31, 2020, net of reinsurance
and indemnification, as well as cumulative claim frequency and the total of IBNR
liabilities, including expected development on reported claims included within
the net incurred losses and allocated LAE amounts. The tables are grouped by
major product line and, if relevant, coverage. The information about incurred
and paid claims development for the years ended December 31, 2016 through 2019
is presented as supplementary information and is unaudited.
89--------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued) Specialty Personal Automobile Insurance-Liability DOLLARS IN MILLIONS, EXCEPT CUMULATIVE REPORTED CLAIMS
As of December 31, 2020
Total of IBNR
Cumulative Incurred Losses and Allocated LAE, Net of Reinsurance Liabilities
For the Years Ended December 31, Plus Expected Cumulative
Development on Number of
Accident Year 2016 2017 2018 2019 2020 Reported Claims Reported Claims
2016 $ 969.4 $ 1,021.6 $ 1,027.2 $ 1,026.0 $ 1,022.7 $ 4.7 417,219
2017 997.7 999.9 1,004.5 999.1 13.7 397,059
2018 1,128.1 1,119.1 1,120.0 33.9 447,610
2019 1,270.7 1,306.9 91.4 485,455
2020 1,219.3 368.6 399,216
Total $ 5,668.0
Cumulative Paid Losses and AllocatedLAE, Net of Reinsurance
For the Years Ended December 31,
Accident Year 2016 2017 2018 2019 2020
2016 $ 459.7 $ 831.1 $ 943.4 $ 987.7 $ 1,008.3
2017 441.9 808.6 926.7 967.7
2018 467.5 903.8 1,039.3
2019 497.2 1,052.5
2020 491.6
Total 4,559.4Outstanding Loss and Allocated LAE Reserves on Accident Years before 2016, Net of Reinsurance
3.9
Loss and Allocated LAE Reserves, Net of Reinsurance $ 1,112.5
90
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued) Specialty Personal Automobile Insurance-Physical Damage DOLLARS IN MILLIONS, EXCEPT CUMULATIVE REPORTED CLAIMS
As of December 31, 2020
Total of IBNR
Cumulative Incurred Losses and Allocated LAE, Net of Reinsurance Liabilities
For the Years Ended December 31, Plus Expected Cumulative
Development on Number of
Accident Year 2016 2017 2018 2019 2020 Reported Claims Reported Claims
2016 $ 462.2 $ 456.9 $ 456.9 $ 457.0 $ 457.4 $ (0.1) 246,239
2017 475.6 465.6 465.1 465.6 0.1 251,935
2018 504.9 496.9 496.4 (0.4) 270,000
2019 574.7 581.0 (10.7) 286,954
2020 600.2 52.0 252,237
Total 2,600.6
Cumulative Paid Losses and Allocated LAE, Net of Reinsurance
For the Years Ended December 31,
Accident Year 2016 2017 2018 2019 2020
2016 $ 436.4 $ 460.2 $ 458.0 $ 457.5 $ 457.5
2017 443.0 468.7 466.0 465.9
2018 463.6 501.5 497.4
2019 525.8 585.7
2020 542.2
Total 2,548.7Outstanding Loss and Allocated LAE Reserves on Accident Years before 2016, Net of Reinsurance
1.6
Loss and Allocated LAE Reserves, Net of Reinsurance $ 53.5
91--------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued) Commercial Automobile Insurance-Liability DOLLARS IN MILLIONS, EXCEPT CUMULATIVE REPORTED CLAIMS
As of December 31, 2020
Total of IBNR
Cumulative Incurred Losses and Allocated LAE, Net of Reinsurance Liabilities
For the Years Ended December 31, Plus Expected Cumulative
Development on Number of
Accident Year 2016 2017 2018 2019 2020 Reported Claims Reported Claims
2016 $ 120.5 $ 112.4 $ 115.6 $ 117.7 $ 115.6 $ 1.1 20,427
2017 120.5 120.0 118.3 114.3 2.9 19,951
2018 123.2 116.5 113.0 12.6 20,146
2019 128.4 126.1 19.4 19,404
2020 140.5 60.5 16,457
Total $ 609.5
Cumulative Paid Losses and Allocated LAE, Net of Reinsurance and Indemnification
For the Years Ended December 31,
Accident Year 2016 2017 2018 2019 2020
2016 $ 36.2 $ 71.6 $ 89.7 $ 102.3 $ 109.7
2017 36.3 72.3 90.7 101.7
2018 36.8 68.8 88.1
2019 32.4 75.7
2020 37.0
Total 412.2Outstanding Loss and Allocated LAE Reserves on Accident Years before 2016, Net of Reinsurance
11.8
Loss and Allocated LAE Reserves, Net of Reinsurance $ 209.1
92
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued) Commercial Automobile Insurance-Physical Damage DOLLARS IN MILLIONS, EXCEPT CUMULATIVE REPORTED CLAIMS
As of December 31, 2020
Total of IBNR
Cumulative Incurred Losses and Allocated LAE, Net of Reinsurance Liabilities
For the Years Ended December 31, Plus Expected Cumulative
Development on Number of
Accident Year 2016 2017 2018 2019 2020 Reported Claims Reported Claims
2016 $ 24.2 $ 24.2 $ 24.1 $ 24.2 $ 24.2 $ - 10,561
2017 24.2 23.5 23.5 23.4 0.1 9,792
2018 23.6 23.5 23.6 0.1 9,567
2019 26.0 27.1 (0.3) 9,290
2020 31.9 4.6 10,936
Total $ 130.2
Cumulative Paid Losses and Allocated LAE, Net ofReinsurance and Indemnification
For the Years Ended December 31,
Accident Year 2016 2017 2018 2019 2020
2016 $ 22.4 $ 24.2 $ 24.1 $ 24.2 $ 24.2
2017 22.2 23.5 23.4 23.4
2018 21.7 23.6 23.6
2019 23.0 26.9
2020 26.2
Total 124.3Outstanding Loss and Allocated LAE Reserves on Accident Years before 2016, Net of Reinsurance
0.4
Loss and Allocated LAE Reserves, Net of Reinsurance $ 6.3
93
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued) Preferred Personal Automobile Insurance-Liability DOLLARS IN MILLIONS, EXCEPT CUMULATIVE REPORTED CLAIMS
As of December 31, 2020
Total of IBNR
Cumulative Incurred Losses and Allocated LAE, Net of Reinsurance Liabilities
For the Years Ended December 31, Plus Expected Cumulative
Development on Number of
Accident Year 2016 2017 2018 2019 2020 Reported Claims Reported Claims
2016 $ 162.1 $ 174.5 $ 179.1 $ 176.8 $ 177.2 $ 1.6 36,766
2017 164.4 157.8 155.8 158.2 1.9 33,731
2018 157.6 156.3 161.7 6.1 32,246
2019 172.2 195.5 20.0 35,891
2020 148.9 45.8 23,543
Total $ 841.5
Cumulative Paid Losses and Allocated LAE, Net of Reinsurance
For the Years Ended December 31,
Accident Year 2016 2017 2018 2019 2020
2016 $ 61.2 $ 114.6 $ 145.6 $ 161.1 $ 169.3
2017 59.2 108.9 134.1 143.2
2018 55.5 107.6 132.7
2019 62.7 127.9
2020 44.4
Total 617.5Outstanding Loss and Allocated LAE Reserves on Accident Years before 2016, Net of Reinsurance
8.6
Loss and Allocated LAE Reserves, Net of Reinsurance $ 232.6
94
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued) Preferred Personal Automobile Insurance-Physical Damage DOLLARS IN MILLIONS, EXCEPT CUMULATIVE REPORTED CLAIMS
As of December 31, 2020
Total of IBNR
Cumulative Incurred Losses and Allocated LAE, Net of Reinsurance Liabilities
For the Years Ended December 31, Plus Expected Cumulative
Development on Number of
Accident Year 2016 2017 2018 2019 2020 Reported Claims Reported Claims
2016 $ 106.6 $ 106.6 $ 106.3 $ 106.2 $ 106.2 $ - 65,191
2017 109.2 105.8 105.2 105.1 - 62,385
2018 113.9 111.0 110.4 (0.1) 60,707
2019 126.4 125.8 (0.7) 63,776
2020 96.1 (0.7) 43,539
Total $ 543.6
Cumulative Paid Losses and Allocated LAE, Net of Reinsurance
For the Years Ended December 31,
Accident Year 2016 2017 2018 2019 2020
2016 $ 105.2 $ 106.9 $ 106.3 $ 106.3 $ 106.2
2017 104.4 106.1 105.2 105.1
2018 107.2 111.4 110.4
2019 120.7 126.5
2020 90.9
Total 539.1Outstanding Loss and Allocated LAE Reserves on Accident Years before 2016, Net of Reinsurance (0.1) Loss and Allocated LAE Reserves, Net of Reinsurance
$ 4.4
95
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued) Homeowners Insurance DOLLARS IN MILLIONS, EXCEPT CUMULATIVE REPORTED CLAIMS
As of December 31, 2020
Total of IBNR
Cumulative Incurred Losses and Allocated LAE, Net of Reinsurance Liabilities
For the Years Ended December 31, Plus Expected Cumulative
Development on Number of
Accident Year 2016 2017 2018 2019 2020 Reported Claims Reported Claims
2016 $ 200.3 $ 201.7 $ 204.2 $ 202.2 $ 201.1 $ 0.3 20,019
2017 261.2 259.5 245.2 243.8 0.6 20,796
2018 185.9 183.0 183.6 3.0 17,104
2019 162.9 161.8 4.1 15,311
2020 157.0 17.5 12,529
Total $ 947.3
Cumulative Paid Losses and Allocated LAE, Net of Reinsurance
For the Years Ended December 31,
Accident Year 2016 2017 2018 2019 2020
2016 $ 141.2 $ 190.1 $ 195.8 $ 198.9 $ 199.5
2017 165.8 242.5 235.7 239.5
2018 127.4 180.2 180.0
2019 111.1 150.4
2020 94.6
Total 864.0Outstanding Loss and Allocated LAE Reserves on Accident Years before 2016, Net of Reinsurance
5.1
Loss and Allocated LAE Reserves, Net of Reinsurance $ 88.4
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 Company's claims associated with automobile insurance are counted at the
feature level. As such, each claimant and each coverage is counted separately.
For example, if for one occurrence, the Company's policyholder is at fault for
damage to his/her own vehicle, another party's vehicle and three injured
parties, there may be five features-three for bodily injury liability, one for
property damage liability and one for first-party collision coverage. There may
also be another feature for first-party medical payments.
96
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued) 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.
DOLLARS IN MILLIONS 2020
Property and Casualty Insurance Reserves, Net of Reinsurance:
Specialty Personal Automobile Insurance-Liability $ 1,112.5
Specialty Personal Automobile Insurance-Physical Damage 53.5
Commercial Automobile Insurance-Liability 209.1
Commercial Automobile Insurance-Physical Damage 6.3
Preferred Personal Automobile Insurance-Liability 232.6
Preferred Personal Automobile Insurance-Physical Damage
4.4
Homeowners Insurance 88.4
Other 49.9
Total $ 1,756.7Reinsurance Recoverables on Unpaid Losses and Allocated LAE:
Specialty Personal Automobile Insurance-Liability $ 9.3
Commercial Automobile Insurance-Liability 5.8
Preferred Personal Automobile Insurance-Liability
23.2
Homeowners Insurance 7.6
Other 4.2
Total 50.1
Unallocated LAE 175.7
Property and Casualty Insurance Reserves, Gross of Reinsurance $ 1,982.5
The following is supplementary information about average historical claims duration as of December 31, 2020.
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (Unaudited)
Years 1 2 3 4 5
Specialty Personal Automobile Insurance-Liability 41.9 % 80.9 % 92.6 % 96.7 % 98.6 % Specialty Personal Automobile Insurance-Physical Damage
93.0 % 100.8 % 100.1 % 100.0 % 100.0 % Commercial Automobile Insurance-Liability
29.5 % 61.5 % 78.3 % 88.7 % 94.9 % Commercial Automobile Insurance-Physical Damage
89.3 % 99.9 % 99.9 % 100.0 % 100.0 % Preferred Personal Automobile Insurance-Liability
33.6 % 66.4 % 83.0 % 90.7 % 95.5 % Preferred Personal Automobile Insurance-Physical Damage
97.2 % 100.8 % 100.1 % 100.0 % 100.0 %
Homeowners Insurance 67.3 % 96.3 % 97.4 % 98.6 % 99.2 %
97--------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued) Property and Casualty Insurance Reserve activity for the years ended December 31, 2020, 2019 and 2018 was: DOLLARS IN MILLIONS
2020 2019 2018
Beginning Property and Casualty Insurance Reserves: Gross of Reinsurance at Beginning of Year
$ 1,969.8 $ 1,874.9 $ 1,016.8
Less Reinsurance Recoverables at Beginning of Year 65.6 101.9 53.1
Property and Casualty Insurance Reserves, Net of
Reinsurance at Beginning of Year 1,904.2 1,773.0 963.7
Property and Casualty Insurance Reserves Acquired, Net of Reinsurance
- 3.6 695.1
Incurred Losses and LAE related to:
Current Year 2,873.6 2,879.5 2,093.4
Prior Years 36.4 (71.1) (7.4)
Total Incurred Losses and LAE 2,910.0 2,808.4 2,086.0
Paid Losses and LAE related to:
Current Year: 1,679.1 1,682.1 1,300.8
Prior Years 1,202.7 998.7 671.0
Total Paid Losses and LAE 2,881.8 2,680.8 1,971.8
Property and Casualty Insurance Reserves, Net of
Reinsurance at End of Year 1,932.4 1,904.2 1,773.0
Plus Reinsurance Recoverables at End of Year 50.1 65.6 101.9
Property and Casualty Insurance Reserves, Gross of Reinsurance at End of Year
$ 1,982.5 $ 1,969.8 $ 1,874.9
Property and Casualty Insurance Reserves are estimated based on historical
experience patterns and current economic trends. Actual loss experience and loss
trends are likely to differ from these historical experience patterns and
economic conditions. Loss experience and loss trends emerge over several years
from the dates of loss inception. The Company monitors such emerging loss trends
on a quarterly basis. Changes in such estimates are included in the Consolidated
Statements of Income in the period of change.
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.
In 2019, the Company decreased its property and casualty insurance reserves by
$71.1 million to recognize favorable development of loss and LAE reserves from
prior accident years. Specialty Personal Automobile insurance loss and LAE
reserves developed favorably by $23.8 million due primarily to the emergence of
more favorable loss patterns than expected for both liability and physical
damage insurance for the 2018 accident year. Commercial lines insurance loss and
LAE reserves included favorable development of $12.9 million due primarily to
the emergence of more favorable loss patterns than expected for commercial
automobile liability insurance for 2018 and 2017 accident years. Preferred
Personal Automobile insurance loss and LAE reserves developed favorably by $8.2
million due primarily to the emergence of more favorable loss patterns than
expected for liability insurance for several prior accident years and for
physical damage insurance for 2018 accident year. Homeowners insurance loss and
LAE reserves developed favorably by $19.7 million due primarily to the net
reinsurance impact from the sale of subrogation rights related to the 2017 and
2018 California Wildfires. Other personal lines loss and LAE reserves developed
favorably by $6.5 million due primarily to the emergence of more favorable loss
patterns than expected for prior accident years.
98
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)
In 2018, the Company increased its property and casualty insurance reserves by
$7.4 million to recognize favorable development of loss and LAE reserves from
prior accident years. Specialty Personal Automobile insurance loss and LAE
reserves developed adversely by $5.5 million due primarily to the emergence of
loss patterns that were worse than expected for both physical damage and
liability insurance for the 2017 accident year, partially offset by the
emergence of loss patterns that were better than expected for 2016 and prior
accident years. Commercial lines insurance loss and LAE reserves developed
favorably by $6.1 million. Preferred Personal automobile insurance loss and LAE
reserves developed favorable by $5.8 million due primarily to the emergence of
loss patterns that were better than expected for both physical damage and
liability insurance for the 2017 accident year and, to a lesser extent, for
liability insurance for the 2015 and prior accident years, partially offset by
the emergence of loss patterns that was worse than expected for the 2016
accident year. Homeowners insurance loss and LAE reserves developed adversely by
$3.2 million due primarily to the emergence of non-catastrophe loss patterns
that were worse than expected for the 2016 accident year. Other personal lines
loss and LAE reserves developed favorably by $4.3 million due primarily to the
emergence of more favorable loss patterns than expected for prior accident
years.
The Company cannot predict whether loss and LAE reserves will develop favorably
or unfavorably from the amounts reported in the Consolidated Financial
Statements. The Company believes that any such development will not have a
material effect on the Company's consolidated financial position, but could have
a material effect on the Company's consolidated financial results for a given
period.
Reinsurance recoverables on property and casualty insurance reserves were $50.1
million and $65.6 million at December 31, 2020 and 2019, respectively. These
recoverables are concentrated with several reinsurers, the majority of which are
highly rated by one or more of the principal investor and/or insurance company
rating agencies. While most of these recoverables were unsecured at December 31,
2020 and 2019, the agreements with the reinsurers generally provide for some
form of collateralization upon the occurrence of certain events
Receivables from Policyholders - Allowance for Expected Credit Losses
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.
Receivables from
Policyholders, Net
of Allowance for Allowance for
Expected Credit Expected Credit
(Dollars in Millions) Losses Losses
Balance at Beginning of Year $ 1,117.1 $ 22.3
Provision for Expected Credit Losses 45.5
Write-offs of Uncollectible Receivables from Policyholders (46.9)
Balance at End of Period $ 1,194.5 $ 20.9
NOTE 7. POLICYHOLDER OBLIGATIONS
Policyholder Obligations at December 31, 2020 and 2019 were as follows:
Dec 31, Dec 31,
DOLLARS IN MILLIONS 2020 2019
FHLB Funding Agreements $ 407.8 $ 243.4
Other 59.2 66.4
Total $ 467.0 $ 309.8
Kemper's subsidiary, United Insurance has entered into funding agreements with
the FHLB of Chicago in exchange for cash, which it uses for spread lending
purposes. United Insurance received advances of $466.4 million from the FHLB of
Chicago and made repayments of $302.0 million under the spread lending program
in 2020. United Insurance received advances of $614.5 million and made
repayments of $381.1 million under the spread lending program in 2019.
When a funding agreement is issued, United Insurance is then required to post
collateral in the form of eligible securities including mortgage-backed,
government, and agency debt instruments for each of the advances that are
entered. The fair value of the collateral pledged must be maintained at certain
specified levels above the borrowed amount, which can vary depending
99
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 7. POLICYHOLDER OBLIGATIONS (Continued)
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 .
United Insurance's liability under the funding agreements with the FHLB of
Chicago , the amount of collateral pledged under such agreements and FHLB of
Chicago common stock owned by United Insurance at December 31, 2020 and 2019 is
presented below.
Dec 31, Dec 31,
DOLLARS IN MILLIONS 2020 2019
Liability under Funding Agreements $ 407.8 $ 243.4
Fair Value of Collateral Pledged 530.5 287.8
FHLB of Chicago Common Stock Owned at Cost 11.8 4.9
NOTE 8. DEBT Amended and Extended Credit Agreement and Term Loan Facility 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. Long-term Debt 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: DOLLARS IN MILLIONS 2020 2019 Term Loan due July 5, 2023 $ 49.9 $ 49.9
5.000% Senior Notes due September 19, 2022 278.3 279.9 4.350% Senior Notes due February 15, 2025
448.8 448.6
2.400% Senior Notes due September 30, 2030 395.8 -
Total Long-term Debt Outstanding $ 1,172.8 $ 778.4
Term Loan Due 2023
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).
5.000% Senior Notes Due 2022
Infinity's liabilities at the acquisition date included $275.0 million principal
amount, 5.000% Senior Notes due September 19, 2022 (the "2022 Senior Notes").
The 2022 Senior Notes were recorded at fair value as of the acquisition date,
$282.1 million, with the $7.1 million premium being amortized as a reduction to
interest expense over the remaining term, resulting in an effective interest
rate of 4.36%. On November 30, 2018, Kemper executed a guarantee to fully and
unconditionally guarantee the payment and performance obligations of the 2022
Senior Notes.
100
--------------------------------------------------------------------------------
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 8. DEBT (Continued)
4.350% Senior Notes Due 2025
Kemper has $450.0 million aggregate principal of 4.350% senior notes due
February 15, 2025 (the "2025 Senior Notes") outstanding as of December 31, 2020.
Kemper initially issued $250.0 million of the notes in February of 2015 and
issued an additional $200.0 million of the notes in June of 2018. The additional
notes are fungible with the initial notes issued in 2015, and together are
treated as part of a single series for all purposes under the indenture
governing the 2025 Senior Notes. The 2025 Senior Notes are unsecured and may be
redeemed in whole at any time or in part from time to time at Kemper's option at
specified redemption prices.
2.400% Senior Notes Due 2030
On September 22, 2020, Kemper offered and sold $400.0 million aggregate
principal of 2.400% senior notes due September 30, 2030 (the "2030 Senior
Notes"). The net proceeds of issuance were $395.6 million, net of discount and
transaction costs for an effective yield of 2.52%. The 2030 Senior Notes are
unsecured and may be redeemed in whole at any time or in part from time to time
at Kemper's option at specified redemption prices. Kemper is using the net
proceeds from the issuance for general corporate purposes.
Redemption of 7.375% Subordinated Debentures Due 2054
On June 7, 2019, Kemper issued a notice of redemption for the entire $150.0
million aggregate principal outstanding of its 7.375% Subordinated Debentures
due 2054 (the "7.375% Subordinated Debentures") at a redemption price equal to
100% of their principal, plus accrued and unpaid interest on the redemption
date. On July 8, 2019, Kemper completed the redemption, and the 7.375%
Subordinated Debentures were repaid in full. The Company recognized a loss on
early extinguishment of debt of $5.8 million in its December 31, 2019
Consolidated Statement of Income.
The Company used the proceeds received from Kemper's common stock offering on
June 7, 2019, as well as a portion of the proceeds from its July 5, 2019
borrowing under the 2023 Term Loan, to repay the 7.375% Subordinated Debentures.
See Note 10, "Shareholders' Equity," for additional information regarding the
common stock offering.
Short-term Debt
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.
Interest Expense and Interest Paid
Interest Expense, including facility fees, accretion of discount, amortization
of premium and amortization of issuance costs, was $36.0 million, $42.5 million
and $43.3 million for the years ended December 31, 2020, 2019 and 2018,
respectively. Interest paid, including facility fees, was $34.6 million, $44.0
million and $37.9 million for the years ended December 31, 2020, 2019 and 2018,
respectively.
101--------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 9. LEASES 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. The following table presents operating lease ROU assets and lease liabilities. DOLLARS IN MILLIONS 2020 2019
Operating Lease Right-of-Use Assets $ 68.6 $ 75.6 Operating Lease Liabilities
89.6 93.2
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.
DOLLARS IN MILLIONS 2020 2019
Lease Cost:
Amortization of Right-of-Use Assets - Finance Leases $ 0.3 $ 0.7
Operating Lease Cost 20.9 20.7
Short-Term Lease Cost (1) 4.6 0.1
Total Expense 25.8 21.5
Less: Sublease Income (2) - 0.1
Total Lease Cost $ 25.8 $ 21.4
(1) - Leases with an initial term of twelve months of less are not recorded on
the balance sheet.
(2) - Sublease income consists of rent from third parties of office space and is
recognized as part of other income in the Consolidated Statements of Income.
Other Information on Operating Leases
Supplemental cash flow information related to the Company's operating leases for
the year-ended December 31, 2020 is as follows:
DOLLARS IN MILLIONS 2020 2019
Operating Cash Flows from Operating Leases (Fixed Payments) $ 15.8 $ 20.0 Operating Cash Flows from Operating Leases (Liability Reduction)
17.5 17.6
Financing Cash Flows from Finance Leases 0.3 0.7
Right-of-Use Assets Obtained in Exchange for New Operating Lease Liabilities
11.0 25.9
Significant judgments and assumptions for determining lease asset and liability as December 31, 2020 and December 31, 2019 respectively are presented below.
2020 2019
Weighted-average Remaining Lease Term - Finance Leases 0.7 years 1.7 years
Weighted-average Remaining Lease Term - Operating Leases 6.7 years 7.0 years
Weighted-average Discount Rate - Finance Leases 4.0 % 4.0 %
Weighted-average Discount Rate - Operating Leases 4.0 % 3.9 %
Most of the Company's leases do not provide an implicit rate. Accordingly, the
Company uses its incremental borrowing rate based on the information available
at the commencement date in determining the present value of its lease payments.
102--------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 9. LEASES (Continued) Future minimum lease payments under finance and operating leases at December 31, 2020 were: Finance Operating DOLLARS IN MILLIONS Leases Leases 2021 $ 0.2 $ 20.8 2022 - 19.5 2023 - 17.8 2024 - 13.1 2025 - 8.4 2026 and Thereafter - 24.2 Total Future Payments 0.2 103.8 Less Discount - 14.2
Present Value of Minimum Lease Payments $ 0.2 $ 89.6
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.
NOTE 10. SHAREHOLDERS' EQUITY
Common Stock Issuance
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.
In conjunction with the closing of the Infinity acquisition, Kemper issued
13,184,107 shares of common stock on July 2, 2018, at $74.53 per share. See Note
3, "Acquisition of Business," to the Consolidated Financial Statements for
additional information.
Common Stock Repurchases
On May 6, 2020, Kemper's Board of Directors authorized the repurchase of up to
an additional $200.0 million of Kemper common stock, in addition to the $243.7
million remaining under the previous authorization as of December 31, 2019. As
of December 31, 2020, the remaining share repurchase authorization was $333.3
million under the repurchase program. During the year ended December 31, 2020,
Kemper repurchased and retired 1.6 million shares of its common stock in open
market transactions under its share repurchase authorization for an aggregate
cost of $110.4 million and average cost per share of $68.29.
Shares purchased during 2020 were as follows:
Total Maximum
Dollar Value of
Number of Shares Shares
Average Purchased as Part that May Yet Be
Total Price of Publicly Purchased Under
the Plans or
Number of Shares Paid per Announced Plans Programs
(Dollars in
Period Purchased Share or Programs Millions)
March 1 - 31, 2020 1,488,668 $ 67.98 1,488,668 $ 142.5
April 1 - 30, 2020 128,019 $ 71.85 1,616,687 $ 133.3
Total 1,616,687 $ 68.29 1,616,687 $ 333.3
103--------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 10. SHAREHOLDERS' EQUITY (Continued) Kemper did not repurchase any of its common stock in open market transactions in 2019 or 2018. Employee Stock Purchase Plan During the second quarter of 2019, the Company's stockholders approved the adoption of the Kemper Employee Stock Purchase Plan ("ESPP") and the reservation of 1.3 million shares for issuance under the ESPP. Under the ESPP, the Company issued 60,703 shares under the plan in 2020 at an average discounted price of $61.57 per share and 24,080 shares under the plan in 2019 at an average discounted price of 66.08 per share. Compensation costs charged against income were $0.7 million and $0.3 million for the years ended December 31, 2020 and 2019, respectively. Dividends Various state insurance laws restrict the amount that an insurance subsidiary may pay in the form of dividends, loans or advances without the prior approval of regulatory authorities. Also, that portion of an insurance subsidiary's net equity which results from differences between statutory insurance accounting practices and GAAP would not be available for cash dividends, loans or advances. Kemper's insurance subsidiaries paid dividends of $322.0 million to Kemper in 2020. In 2021, Kemper's insurance subsidiaries would be able to pay $402.8 million in dividends to Kemper without prior regulatory approval. Kemper's insurance subsidiaries had net assets of $4.4 billion, determined in accordance with GAAP, that were restricted from payment to Kemper without prior regulatory approval at December 31, 2020. Kemper's insurance subsidiaries are 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. Kemper's insurance subsidiaries are also required to hold minimum levels of statutory capital and surplus to satisfy regulatory requirements. The minimum statutory capital and surplus, or company action level risk-based capital ("RBC"), necessary to satisfy regulatory requirements for the Company's life and health insurance subsidiaries collectively was $158.1 million at December 31, 2020. The minimum statutory capital and surplus necessary to satisfy regulatory requirements for the Company's property and casualty insurance subsidiaries collectively was $586.6 million at December 31, 2020. Company action level RBC is the level at which a company is required to file a corrective action plan with its regulators and is equal to 200% of the authorized control level RBC. In 2020, Kemper paid dividends of $78.9 million to its shareholders. Except for certain financial covenants under Kemper's credit agreement or during any period in which Kemper elects to defer interest payments, there are no restrictions on Kemper's ability to pay dividends to its shareholders. Certain financial covenants, namely minimum net worth and a maximum debt to total capitalization ratio, under Kemper's credit agreement could limit the amount of dividends that Kemper may pay to shareholders at December 31, 2020. Kemper had the ability to pay without restrictions $1.5 billion in dividends to its shareholders and still be in compliance with all financial covenants under its credit agreement at December 31, 2020. NOTE 11. LONG-TERM EQUITY-BASED COMPENSATION On May 5, 2020, Kemper's shareholders approved the 2020 Omnibus Equity Plan ("2020 Omnibus Plan"). A maximum number of 7,000,000 shares of Kemper common stock may be issued under the 2020 Omnibus Plan (the "Share Authorization"). After the approval date of the 2020 Omnibus Plan, no new awards will be granted under the 2011 Omnibus Equity Plan ("2011 Omnibus Plan") that had been approved by Kemper's Shareholders on May 4, 2011, but awards previously granted under the 2011 Omnibus Plan remain outstanding in accordance with their original terms. As of December 31, 2020, there were 6,734,289 common shares available for future grants under the 2020 Omnibus Plan, of which 1,534,158 shares were reserved for future grants based on the performance results under the terms of outstanding performance share units ("PSUs"). 104 --------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 11. LONG-TERM EQUITY-BASED COMPENSATION (Continued) 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 2020 Omnibus Plan, and for grants under the 2011 Plan beginning in November 2017, recipients of RSUs and PSUs receive dividend equivalents on the same basis as all other outstanding shares of Kemper common stock only if, to the extent, and at the time that they vest and on subsequent dividend payment dates after they vest until the awards are settled, and do not receive voting rights until such shares are issued. For 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. For awards subject to a performance condition, the Company recognizes compensation expense based upon the probable outcome of the performance condition, which on the grant date reflects an estimate of attaining 100% of the performance units granted. The estimate is revised if the actual number of PSUs expected to vest is likely to differ from the previous estimate. Compensation expense for awards is recognized on a straight-line basis over the requisite service period. For equity-based compensation awards with a graded vesting schedule, the Company recognizes compensation expense on a straight-line basis over the requisite service period for each separately-vesting portion of the awards as if each award were, in substance, multiple awards. Compensation expense is recognized only for those awards expected to vest, with forfeitures estimated at the date of grant based on the Company's historical experience and future expectations. Equity-based compensation expense was $24.9 million, $25.3 million and $18.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. Total unamortized compensation expense related to unvested awards at December 31, 2020 was $24.6 million, which is expected to be recognized over the next three years ending December 31, 2021, 2022 and 2023. Human Resources and the Compensation Committee of the Board of Directors, or the Board's authorized designee, has sole discretion to determine the persons to whom awards under the 2020 Omnibus Plan are granted, and the material terms of the awards. For Tandem Awards, material terms include the number of shares covered by such awards and the exercise price, vesting and expiration dates of such awards. Tandem Awards are non-transferable. The exercise price of Tandem Awards is the fair value of Kemper's common stock on the date of grant. Tandem Awards and RSU awards granted to employees generally vest in three equal annual installments over a period of three years, with the Tandem Awards expiring ten years from the date of grant. Employee PSU awards generally vest over a period of three years, subject to performance results and other restrictions. 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 105 --------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements
NOTE 11. LONG-TERM EQUITY-BASED COMPENSATION (Continued)
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 awards are settled. Each Non-employee Director elected at the 2019 annual shareholder meeting received an annual Director RSU award with an aggregate grant date fair value of $130,000 at the conclusion of the meeting, and, each Non-employee Director elected at the 2018 annual shareholder meeting received an annual DSU award with an aggregate grant date fair value of $110,000 at the conclusion of the meeting, under the Non-employee Director compensation program in effect for the applicable year. The DSUs granted to Non-employee Directors are fully vested on the date of grant and include the right to receive full dividend equivalents on the same basis as all other outstanding shares of Kemper common stock. Conversion of the DSUs into shares of Kemper's common stock is deferred until the date a director's board service terminates. The Company uses the Black-Scholes option pricing model to estimate the fair value of each Tandem Award on the date of grant. The expected terms of Tandem Awards are developed by considering the Company's historical Tandem Award exercise experience, demographic profiles, historical share retention practices of employees and assumptions about their propensity for early exercise in the future. Expected volatility is estimated using weekly historical volatility. The Company believes that historical volatility is currently the best estimate of expected volatility. The dividend yield in 2020, 2019 and 2018 was calculated by taking the natural logarithm of the annualized yield divided by the Kemper common stock price on the date of grant. The risk-free interest rate was the yield on the grant date ofU.S. Treasury zero coupon issues with a maturity comparable to the expected term of the option. 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. 2020 2019 2018 RANGE OF VALUATION ASSUMPTIONS Expected Volatility 29.22 % - 37.27 % 28.97 % - 33.78 % 27.31 % - 32.15 % Risk-free Interest Rate 0.17 - 1.46 1.35 - 2.60 2.44 - 3.00 Expected Dividend Yield 1.19 - 1.48 1.05 - 1.38 1.16 - 1.72 WEIGHTED-AVERAGE EXPECTED LIFE IN YEARS Employee Grants 4 - 6 4 - 6 4 - 6 Tandem Award activity for the year ended December 31, 2020 is presented below. Weighted- Weighted- average Aggregate Shares average Remaining Intrinsic Subject to Exercise Price Contractual Value Awards Per Share ($) Life (in Years) ($ In Millions) Outstanding at Beginning of the Year 1,808,815 $ 56.53 Granted 375,534 75.91 Exercised (215,700) 45.64 Forfeited or Expired (67,692) 73.88 Outstanding at December 31, 2020 1,900,957 60.97 7.11 $ 30.6 Vested and Expected to Vest at December 31, 2020 1,823,133 $ 60.47 7.06 $ 30.3 Exercisable at December 31, 2020 1,045,250 $ 50.78 6.06 $ 27.4 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 $0.8 million for the years ended December 31, 2020, 2019 and 2018, respectively. 106 --------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 11. LONG-TERM EQUITY-BASED COMPENSATION (Continued) Information pertaining to Tandem Awards outstanding at December 31, 2020 is presented below. Outstanding Exercisable Weighted- Weighted- average Weighted- Shares average Remaining Shares average Subject to Exercise Price Contractual Subject to Exercise Price Range of Exercise Prices ($) Awards Per Share ($) Life (in Years) Awards Per Share ($) $ 20.01 - $ 30.00 108,562 $ 27.79 5.03 108,562 $ 27.79 30.01 - 40.00 128,727 34.65 4.42 128,727 34.65 40.01 - 50.00 354,641 42.47 5.75 354,641 42.47 50.01 - 60.00 375,420 59.88 6.89 231,918 59.87 60.01 - 70.00 77,132 66.62 7.26 40,295 66.90 70.01 - 80.00 812,286 76.34 8.44 165,104 76.28 80.01 - 90.00 44,189 84.78 7.97 16,003 85.24 20.01 - 90.00 1,900,957 60.97 7.11 1,045,250 50.78 The grant-date fair values of RSUs are determined using the closing price of Kemper common stock on the date of grant. Activity related to nonvested RSUs for the year ended December 31, 2020 is presented below.
Time-based Restricted Stock Unit Awards
Weighted-
average
Number of Grant-date
Restricted Stock Fair Value
Units Per Unit
Nonvested Balance at Beginning of the Year 182,188 $ 71.12
Granted 68,325 68.38
Vested (106,807) 68.54
Forfeited (11,680) 65.37
Nonvested Balance at December 31, 2020 132,026 $ 72.30
The initial number of PSUs awarded to each participant represents the number of
Kemper common shares that would vest and be issued if the performance level
attained were to be at the "target" performance level. For performance above the
target level, each participant would receive a grant of additional shares of
stock up to a maximum of 100% of the initial number of PSUs awarded to the
participant. The final payout of these awards, and any forfeitures of PSUs for
performance below the "target" performance level, will be determined based on
the Company's performance. If, at the end of the applicable performance period,
the Company's performance:
•exceeds the "target" performance level, all of the PSUs will vest and
additional shares of stock will be issued to the award recipient;
•is below the "target" performance level, but at or above a "minimum"
performance level, only a portion of the PSUs originally issued to the award
recipient will vest; or
•is below a "minimum" performance level, none of the PSUs originally issued to
the award recipient will vest.
107
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 11. LONG-TERM EQUITY-BASED COMPENSATION (Continued)
Activity related to nonvested PSU awards for the year ended December 31, 2020 is
presented below.
PSU Awards
Weighted-
average
Grant-date
Fair Value
Number of PSUs Per PSU
Nonvested Balance at Beginning of the Year 360,820 $ 66.42
Granted 340,579 74.99
Vested (165,672) 45.90
Forfeited (32,870) 79.69
Nonvested Balance at December 31, 2020 502,857 $ 78.12
The number of additional shares that would be granted if the Company were to
meet or exceed the maximum performance levels related to the outstanding PSU
awards for the 2020, 2019 and 2018 three-year performance periods was 248,890
common shares, 134,858 common shares and 127,638 common shares, respectively,
(as "full value awards," the equivalent of 746,670 shares, 404,574 shares, and
382,914 shares, respectively, under the Share Authorization) at December 31,
2020.
The grant date fair values of the PSU awards with a market performance condition
are determined using the Monte Carlo simulation method. The Monte Carlo
simulation model produces a risk-neutral simulation of the daily returns on the
common stock of Kemper and each of the other companies included in the peer
group. Returns generated by the simulation depend on the risk-free interest rate
used and the volatilities of, and the correlation between, these stocks. The
model simulates stock prices and dividend payouts to the end of the three-year
performance period. Total shareholder returns are generated for each of these
stocks based on the simulated prices and dividend payouts. The total shareholder
returns are then ranked, and Kemper's simulated ranking is converted to a payout
percentage based on the terms of the PSU awards. The payout percentage is
applied to the simulated stock price at the end of the performance period,
reinvested dividends are added back, and the total is discounted to the
valuation date at the risk-free rate. This process is repeated approximately ten
thousand times, and the grant date fair value is equal to the average of the
results from these trials.
Sixty-seven percent of the PSU awards granted to employees in 2020, and fifty
percent of the PSU awards granted to employees in 2019 and 2018 are measured
using a market performance condition. Fair value for these awards was estimated
using the Monte Carlo simulation method described above. Final payout for these
awards, and any forfeitures of units for performance below the "target"
performance level, will be based on Kemper's total shareholder return, relative
to a peer group comprised of all the companies in the S&P Supercomposite
Insurance Index, over a three-year performance period. The three-year
performance periods for the 2020, 2019 and 2018 awards end on January 31, 2023,
January 31, 2022 and January 31, 2021, respectively. Compensation cost for these
awards is recognized ratably over the requisite service period. In the event
that the market performance condition is not satisfied, previously recognized
compensation cost would not reverse, but it would reverse if the requisite
service period is not met.
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.
108
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 11. LONG-TERM EQUITY-BASED COMPENSATION (Continued)
The grant-date fair values of DSU awards granted to Non-employee Directors are
determined using the closing price of Kemper common stock on the date of grant.
The total fair value of DSUs that vested during the years ended December 31,
2020, 2019, and 2018 was $0.0 million, $0.0 million and $1.0 million,
respectively.
Activity related to DSU awards for the year ended December 31, 2020 is presented
below.
Weighted-
average
Grant-date
Fair Value
Number of DSUs Per DSU
Vested Balance at Beginning of the Year 44,820 $ 44.74
Reduction for Shares Issued on Conversion -
-
Vested Balance at December 31, 2020 44,820 $
44.74
NOTE 12. INCOME FROM CONTINUING OPERATIONS PER UNRESTRICTED SHARE
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.
2020 2019 2018
DOLLARS IN MILLIONS
Income from Continuing Operations $ 409.9 $ 531.1 $ 188.4 Less Income from Continuing Operations Attributed to Participating Awards
0.4 1.7 1.0
Income from Continuing Operations Attributed to Unrestricted Shares
409.5 529.4 187.4
Dilutive Effect on Income of Equity-based Compensation Equivalent Shares
- - -
Diluted Income from Continuing Operations Attributed to Unrestricted Shares
$ 409.5 $ 529.4 $ 187.4
SHARES IN THOUSANDS
Weighted-average Unrestricted Shares Outstanding 65,636.1 65,880.9 58,149.4
Equity-based Compensation Equivalent Shares 1,093.7 667.2 602.5
Weighted-average Unrestricted Shares and Equivalent Shares Outstanding Assuming Dilution
66,729.8 66,548.1 58,751.9
PER UNRESTRICTED SHARE IN WHOLE DOLLARS
Basic Income from Continuing Operations Per Unrestricted Share $ 6.24 $ 8.04 $ 3.22
Diluted Income from Continuing Operations Per Unrestricted
Share $ 6.14 $ 7.96 $ 3.19
The number of shares of Kemper common stock that were excluded from the
calculations of Equity-based Compensation Equivalent Shares and Weighted-average
Unrestricted Shares and Equivalent Shares Outstanding Assuming Dilution for the
years ended December 31, 2020, 2019 and 2018, because the effect of inclusion
would be anti-dilutive, is presented below.
SHARES IN THOUSANDS 2020 2019 2018
Equity-based Compensation Equivalent Shares 874.5 556.4 231.3
Weighted-average Unrestricted Shares and Equivalent Shares Outstanding Assuming Dilution
874.5 556.4 231.3
109
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 13. OTHER COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE
INCOME
The components of Other Comprehensive Income (Loss) and Accumulated Other
Comprehensive Income ("AOCI") for the years ended December 31, 2020, 2019 and
2018 were:
Changes in Net Unrealized
Gains (Losses) on Investment Securities
Having Credit
Losses Recognized Total
Having No Credit Losses in Consolidated Foreign Currency NetUnrecognized Gain (Loss) on Accumulated Other
Recognized in Consolidated Statements of Translation Postretirement Benefit Cash Comprehensive
DOLLARS IN MILLIONS Statements of Income Income Adjustments Costs Flow Hedges Income (Loss)
Balance at December 30, 2017 As
Reported $ 269.7 $ - $ 0.2 $ (72.2) $ (3.3) $ 194.4
Cumulative Effect of Adoption of New
Accounting Standards 36.3 - (0.4) (17.0) (0.7) 18.2
Balance at January 1, 2018 As
Adjusted 306.0 - (0.2) (89.2) (4.0) 212.6
Other Comprehensive Income (Loss)
Before Reclassification Adjustment,
Net of Tax (169.2) - (0.1) (5.4) 0.9 (173.8)
Reclassification Adjustment for
Amounts Included in Net Income, Net
of Tax (17.3) - 0.3 - - (17.0)
Other Comprehensive Income (Loss),
Net of Tax (186.5) - 0.2 (5.4) 0.9 (190.8)
Balance at December 30, 2018 $ 119.3 $ - $ - $ (94.5) $ (3.0) $ 21.8
Other Comprehensive Income (Loss)
Before Reclassification Adjustment,
Net of Tax 342.4 - - (6.1) 0.3 336.6
Reclassification Adjustment for
Amounts Included in Net Income, Net
of Tax (22.3) - - - - (22.3)
Other Comprehensive Income (Loss),
Net of Tax 320.1 - - (6.1) 0.3 314.3
Balance at December 30, 2019 $ 439.4 $ - $ - $ (100.6) $ (2.7) $ 336.1
Other Comprehensive Income (Loss)
Before Reclassification Adjustment,
Net of Tax 304.4 (2.1) - 4.3 0.4 307.0
Reclassification Adjustment for
Amounts Included in Net Income, Net
of Tax (13.2) - - 50.6 - 37.4
Other Comprehensive Income (Loss),
Net of Tax 291.2 (2.1) - 54.9 0.4 344.4
Balance at December 30, 2020 $ 730.6 $ (2.1) $ - $ (45.7) $ (2.3) $ 680.5
110--------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 13. OTHER COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE INCOME (Continued) 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: DOLLARS IN MILLIONS 2020 2019 2018
Changes in Net Unrealized Gains (Losses) on Investment Securities: Having No Credit Losses Recognized in Consolidated Statements of Income
$ 386.7 $ 433.4 $ (214.2)
Income Tax Benefit (Expense) (82.3) (91.0) 45.0
Net of Taxes 304.4 342.4 (169.2)
Having Credit Losses Recognized in Consolidated Statements of Income
(2.6) - -
Income Tax Benefit (Expense) 0.5 - -
Net of Taxes (2.1) - -
Reclassification Adjustment for Amounts Included in Net Income (16.8) (28.1) (21.9)
Income Tax Benefit (Expense) 3.6 5.8 4.6
Net of Taxes (13.2) (22.3) (17.3)
Changes in Foreign Currency Translation Adjustments - - 0.3
Income Tax Benefit (Expense) - - (0.1)
Net of Taxes - - 0.2
Changes in Net Unrecognized Postretirement Benefit Costs 70.2 (7.8) (6.9)
Income Tax Benefit (Expense) (15.3) 1.7 1.5
Net of Taxes 54.9 (6.1) (5.4)
Changes in Gain (Loss) on Cash Flow Hedges 0.4 0.4 1.2
Income Tax Benefit (Expense) - (0.1) (0.3)
Net of Taxes 0.4 0.3 0.9
Total Other Comprehensive Income (Loss) Before Income Taxes 437.9 397.9 (241.5)
Total Income Tax Benefit (Expense) (93.5) (83.6) 50.7
Total Other Comprehensive Income (Loss), Net of Taxes $ 344.4 $ 314.3 $ (190.8)
111
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 13. OTHER COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE
INCOME (Continued)
Components of AOCI were reclassified to the following lines of the Consolidated
Statements of Income for the years ended December 31, 2020, 2019 and 2018:
DOLLARS IN MILLIONS 2020 2019 2018
Reclassification of AOCI from Net Unrealized Gains and Losses on Investments to: Net Realized Gains on Sales of Investments
$ 36.3 $ 41.9 $ 26.4
Impairment Losses (19.5) (13.8) (4.5)
Total Before Income Taxes 16.8 28.1 21.9
Income Tax Expense (3.6) (5.8) (4.6)
Reclassification from AOCI, Net of Income Taxes 13.2 22.3 17.3
Reclassification of AOCI from Unrecognized Postretirement Benefit Costs to: Interest and Other (Expenses) Income
(70.2) 3.0 (1.1)
Income Tax Benefit (Expense) 15.3 (0.7) 0.2
Reclassification from AOCI, Net of Income Taxes (54.9) 2.3 (0.9)
Reclassification of AOCI from Loss on Cash Flow Hedges to: Interest and Other Expenses
(0.4) (0.4) (0.3)
Income Tax Benefit - 0.1 0.1
Reclassification from AOCI, Net of Income Taxes (0.4) (0.3) (0.2)
Total Reclassification from AOCI to Net Income $ (42.1) $ 24.3 $ 16.2
NOTE 14. INCOME FROM INVESTMENTS Net Investment Income for the years ended December 31, 2020, 2019 and 2018 was: DOLLARS IN MILLIONS 2020 2019 2018 Investment Income: Interest on Fixed Income Securities $ 289.8
$ 299.4 $ 268.9 Dividends on Equity Securities Excluding Alternative Investments
15.4 22.9 13.6
Alternative Investments:
Equity Method Limited Liability Investments 4.9 1.0 11.0
Limited Liability Investments Included in Equity Securities 22.1 18.0 26.4
Total Alternative Investments 27.0 19.0 37.4
Short-term Investments 5.5 8.2 7.0
Loans to Policyholders 22.1 22.6 22.5
Real Estate 9.6 9.8 9.6
Other 13.2 1.5 0.9
Total Investment Income 382.6 383.4 359.9
Investment Expenses:
Real Estate 8.8 9.6 9.7
Other Investment Expenses 25.6 9.5 9.3
Total Investment Expenses 34.4 19.1 19.0
Net Investment Income $ 348.2 $ 364.3 $ 340.9
Other Receivables includes accrued investment income of $77.1 million and $78.7 million at December 31, 2020, and 2019, respectively.
112
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 14. INCOME FROM INVESTMENTS (Continued)
The components of Net Realized Gains on Sales of Investments for the years ended
December 31, 2020, 2019 and 2018 were:
DOLLARS IN MILLIONS 2020 2019 2018
Fixed Maturities:
Gains on Sales $ 40.6 $ 41.1 $ 25.3
Losses on Sales (7.9) (4.8) (11.1)
Equity Securities:
Gains on Sales 5.9 5.8 12.3
Losses on Sales (1.9) (0.2) -Equity Method Limited Liability Investments:
Losses on Sales (0.4) - - Real Estate: Gains on Sales 1.8 - - Other Investments: Losses on Sales - - (0.1) Net Realized Gains on Sales of Investments $ 38.1 $ 41.9 $ 26.4 Gross Gains on Sales $ 48.3 $ 46.9 $ 37.6 Gross Losses on Sales (10.2) (5.0) (11.2)
Net Realized Gains on Sales of Investments $ 38.1 $ 41.9 $ 26.4
The components of Impairment Losses reported in the Consolidated Statements of
Income for the years ended December 31, 2020, 2019 and 2018 were:
DOLLARS IN MILLIONS 2020 2019 2018
Fixed Maturities $ (16.7) $ (13.3) $ (2.0)
Equity Securities (2.8) (0.5) (2.5)
Impairment Losses $ (19.5) $ (13.8) $ (4.5)
NOTE 15. INSURANCE EXPENSES
Insurance Expenses for the years ended December 31, 2020, 2019 and 2018 were:
DOLLARS IN MILLIONS 2020 2019 2018
Commissions $ 745.8 $ 708.8 $ 558.7
General Expenses 307.4 278.0 231.9
Premium Tax Expense 94.2 93.5 71.0
Total Costs Incurred 1,147.4 1,080.3 861.6
Policy Acquisition Costs:
Deferred (693.4) (475.2) (481.5)
Amortized 641.8 408.3 377.1
Net Policy Acquisition Costs Amortized (Deferred) (51.6) (66.9) (104.4)
Amortization of VOBA 4.7 6.3 143.3
Insurance Expenses $ 1,100.5 $ 1,019.7 $ 900.5
Commissions for servicing policies are expensed as incurred, rather than
deferred and amortized. The Company recorded amortization of Deferred Policy
Acquisition Costs of $641.8 million, $408.3 million and $377.1 million for the
years ended December 31, 2020, 2019 and 2018, respectively.
113
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 16. INCOME TAXES
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:
DOLLARS IN MILLIONS 2020 2019
Deferred Income Tax Assets:
Insurance Reserves $ 18.4 $ 16.2
Unearned Premium Reserves 66.7 64.5
Tax Capitalization of Policy Acquisition Costs 46.6 44.6
Payroll and Employee Benefit Accruals 35.6 35.0
Net Operating Loss Carryforwards 1.1 3.3
Other 13.4 12.5
Total Deferred Income Tax Assets 181.8 176.1
Deferred Income Tax Liabilities:
Investments 258.8 155.6
Deferred Policy Acquisition Costs 123.7 112.9
Life VIF and P&C Customer Relationships 5.0 5.3
Goodwill and Other Intangible Assets Acquired 35.5 39.3
Depreciable Assets 42.1 37.6
Other 2.4 3.6
Total Deferred Income Tax Liabilities 467.5 354.3
Net Deferred Income Tax Liabilities $ 285.7 $ 178.2
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.
DOLLARS IN MILLIONS NOL Carry-forwards Deferred Tax Asset
Expiring in:
2027 $ 0.8 $ 0.2
2028 4.4 0.9
Total All Years $ 5.2 $ 1.1
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.
A reconciliation of the beginning and ending amount of Unrecognized Tax Benefits
for the years ended December 31, 2020, 2019 and 2018 is presented below.
DOLLARS IN MILLIONS 2020 2019 2018
Liabilities for Unrecognized Tax Benefits at Beginning of Year $ - $ 4.4 $ 8.1
Additions for Tax Positions of Current Year - - 0.7
Reductions for Tax Positions of Prior Years - (4.4) (4.4)
Liabilities for Unrecognized Tax Benefits at End of Year $ -
$ - $ 4.4
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.
114
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 16. INCOME TAXES (Continued)
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.
The expiration of the statute of limitations related to the various state income
tax returns that Kemper and its subsidiaries file varies by state.
The components of Income Tax Expense from Continuing Operations for the years
ended December 31, 2020, 2019 and 2018 were:
DOLLARS IN MILLIONS 2020 2019 2018
Current Income Tax Benefit (Expense) $ (86.6) $ (66.4) $ 32.2 Deferred Income Tax Expense (13.6) (68.5)
(46.5)
(Increase) Decrease Unrecognized Tax Benefits - 4.4 3.6
Income Tax Expense $ (100.2) $ (130.5) $ (10.7)
Income taxes paid, net of income tax refunds received, were $55.8 million, $68.1
million, and $0.2 million in 2020, 2019, and 2018, respectively.
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.
2020 2019 2018
DOLLARS IN MILLIONS Amount Rate Amount Rate Amount Rate
Statutory Federal Income Tax Expense $ (107.1) 21.0 % $ (138.9) 21.0 % $ (41.8) 21.0 %
Tax-exempt Income and Dividends
Received Deduction 4.0 (0.8) 4.3 (0.7) 4.8 (2.4)
Untaxed Earnings on Company-Owned
Life Insurance 2.7 (0.5) 1.6 (0.2) 0.8 (0.4)
Investment tax credits 3.2 (0.6) - - - -
Stock-Based Compensation 2.2 (0.5) 4.4 (0.7) 1.4 (0.7)
Nondeductible Executive Compensation (2.7) 0.5 (2.5) 0.4 (1.4) 0.7
Tax Reform - - - - 26.4 (13.3)
Other, Net (2.5) 0.5 0.6 (0.1) (0.9) 0.5
Effective Income Tax Benefit
(Expense) from Continuing Operations $ (100.2) 19.6 % $ (130.5) 19.7 % $ (10.7) 5.4 %
Comprehensive Income Tax (Expense) Benefit included in the Consolidated
Financial Statements for the years ended December 31, 2020, 2019 and 2018 was:
DOLLARS IN MILLIONS 2020 2019 2018
Income Tax Benefit (Expense):
Continuing Operations $ (100.2) $ (130.5) $ (10.7)
Discontinued Operations - - (0.6)
Unrealized Depreciation (Appreciation) on Securities (78.3) (85.2) 49.6
Foreign Currency Translation Adjustments on Investments - - (0.1)
Tax Effects from Postretirement Benefit Plans (15.3) 1.7 1.5
Tax Effects from Cash Flow Hedge - (0.1) (0.3)
Comprehensive Income Tax (Expense) Benefit $ (193.8) $ (214.1) $ 39.4
115--------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 17. PENSION BENEFITS 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. DOLLARS IN MILLIONS 2020 2019 Fair Value of Plan Assets at Beginning of Year $ 664.6 $ 525.3 Actual Return on Plan Assets 92.1 113.2 Employer Contributions - 55.3 Benefits Paid (145.9) (29.2) Settlement Benefits (205.4) - Fair Value of Plan Assets at End of Year 405.4 664.6 Projected Benefit Obligation at Beginning of Year 660.5 580.5 Interest Cost 16.5 22.3 Benefits Paid (145.9) (29.2) Settlement Benefits (205.4) - Actuarial (Gains) Losses 56.6 86.9 Projected Benefit Obligation at End of Year 382.3 660.5
Funded Status-Plan Assets in Excess (Deficit) of Projected Benefit Obligation
$ 23.1 $ 4.1
Unamortized Amount Reported in AOCI at End of Year $ (68.2) $ (145.7) Accumulated Benefit Obligation at End of Year
$ 382.3 $ 660.4
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 weighted-average discount rate and rate of increase in future compensation
levels used to estimate the components of the Projected Benefit Obligation for
the Pension Plan at December 31, 2020 and 2019 were:
2020 2019
Discount Rate 2.56 % 3.21 %
Rate of Increase in Future Compensation Levels 3.40 3.40
Asset allocations for the Pension Plan at December 31, 2020 and 2019 by asset
category were:
ASSET CATEGORY 2020 2019
Corporate Bonds and Notes 37 % 40 %
Common and Preferred Stocks 24 35
Bond Exchange Traded Funds 27 14
Cash and Short-term Investments 2 2
Other Assets 10 9
Total 100 % 100 %
116--------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 17. PENSION BENEFITS (Continued) The investment objective of the Pension Plan is to produce current income and long-term capital growth through a combination of equity and fixed income investments which, together with appropriate employer contributions and any required employee contributions, is adequate to provide for the payment of the benefit obligations of the Pension Plan. The assets of the Pension Plan may be invested in fixed income and equity investments or any other investment vehicle or financial instrument deemed appropriate. Fixed income investments may include cash and short-term instruments,U.S. Government securities, corporate bonds, mortgages and other fixed income investments. Equity investments may include various types of stock, such as large-cap, mid-cap and small-cap stocks, and may also include investments in investment companies, collective investment funds and Kemper common stock (subject to Section 407 and other requirements of ERISA). The Pension Plan has not invested in Kemper common stock. The trust investment committee for the Pension Plan, along with its third party fiduciary advisor, periodically reviews the performance of the Pension Plan's investments and asset allocation. Several external investment managers, one of which isFayez Sarofim & Co. (see Note 24, "Related Parties," to the Consolidated Financial Statements), manage the equity investments of the trust for the Pension Plan. Each manager is allowed to exercise investment discretion, subject to limitations, if any, established by the trust investment committee for the Pension Plan. All other investment decisions are made by the Company, subject to general guidelines as set by the trust investment committee for the Pension Plan. The Company determines its Expected Long Term Rate of Return on Plan Assets based primarily on the Company's expectations of future returns, with consideration to historical returns, for the Pension Plan's investments, based on target allocations of the Pension Plan's investments. The fair values of pension plan assets are estimated using the same methodologies and inputs as those used to determine the fair values for the respective asset category of the Company. These methodologies and inputs are disclosed in Note 22, "Fair Value Measurements," to the Consolidated Financial Statements. Fair value measurements for the Pension Plan's assets at December 31, 2020 are summarized below. Quoted Prices Significant in Active Markets Other Significant for Identical Observable Unobservable Assets Inputs Inputs Measured at Net DOLLARS IN MILLIONS (Level 1) (Level 2) (Level 3) Asset Value Fair Value Fixed Maturities:U.S. Government and Government Agencies and Authorities $ 68.3 $
- $ - $ - $ 68.3 States and Political Subdivisions
- 0.7 - - 0.7
Corporate Bonds and Notes - 81.3 - - 81.3
Equity Securities:
Common Stocks:
Other Industries 64.8 - - - 64.8
Other Equity Interests:
Collective Investment Funds - - - 32.1 32.1
Bond Exchange Traded Funds 108.6 - - - 108.6
Limited Liability Companies and Limited
Partnerships - - - 41.6 41.6
Short-term Investments 7.4 - - - 7.4
Receivables and Other 0.6 - - - 0.6
Total $ 249.7 $ 82.0 $ - $ 73.7 $ 405.4
117--------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 17. PENSION BENEFITS (Continued) Fair value measurements for the Pension Plan's assets at December 31, 2019 are summarized below. Quoted Prices Significant in Active Markets Other Significant for Identical Observable Unobservable Measured at Assets Inputs Inputs Net Asset DOLLARS IN MILLIONS (Level 1) (Level 2) (Level 3) Value Fair Value Fixed Maturities:U.S. Government and Government Agencies and Authorities $ 158.4 $
- $ - $ - $ 158.4 States and Political Subdivisions
- 0.1 - - 0.1
Corporate Bonds and Notes - 107.3 - - 107.3
Equity Securities:
Common Stocks:
Other Industries 140.0 21.5 - - 161.5
Other Equity Interests:
Collective Investment Funds - - - 71.8 71.8
Bond Exchange Traded Funds 92.8 - - - 92.8
Limited Liability Companies and
Limited Partnerships - - - 63.7 63.7
Short-term Investments 10.0 - - - 10.0
Receivables and Other (1.0) - - - (1.0)
Total $ 400.2 $ 128.9 $ - $ 135.5 $ 664.6
Additional information pertaining to the changes in the fair value of the Pension Plan's assets classified as Level 3 in the two preceding tables for the years ended December 31, 2020 and 2019 is presented below. DOLLARS IN MILLIONS
2020 2019
Balance at Beginning of Year $ - $ 0.3
Purchases, Sales and Settlements, Net - (0.3)
Balance at End of Year $ - $ -
118--------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 17. PENSION BENEFITS (Continued) The components of Comprehensive Pension Expense (Income) for the Pension Plan for the years ended December 31, 2020, 2019 and 2018 were: DOLLARS IN MILLIONS 2020 2019 2018 Service Cost Earned During the Year $ - $ - $ - Interest Cost on Projected Benefit Obligation 16.5 22.3 20.3 Expected Return on Plan Assets (27.6) (30.6) (28.9) Amortization of Actuarial Loss 5.6 2.9 4.3 Settlement Expense 64.1 - -
Pension Expense (Income) Recognized in Consolidated Statements of Income
58.6 (5.4) (4.3)
Unrecognized Pension Gain (Loss) Arising During the Year (7.8) 4.2 11.5
Amortization of Accumulated Unrecognized Pension Loss (69.8) (2.9) (4.3)
Comprehensive Pension Expense (Income) $ (19.0) $ (4.1) $ 2.9
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. Settlements 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 fromBanner 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: 2020 2019
2018
Weighted-average Discount Rate 2.56 % 4.28 % 3.63 % Service Cost Discount Rate 2.42 4.26 3.61 Interest Cost Discount Rate 1.89 3.91 3.26
Rate of Increase in Future Compensation Levels 3.40 3.40
3.40
Expected Long Term Rate of Return on Plan Assets 4.90 5.70
5.35
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:
Years Ending December 31,
DOLLARS IN MILLIONS 2021 2022 2023 2024 2025 2026-2030
Estimated Pension Benefit Payments $ 15.8 $ 15.7 $ 16.5 $ 17.2 $ 17.7 $ 93.6
119--------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 17. PENSION BENEFITS (Continued) 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 Company also sponsors several defined contribution benefit plans covering most of its employees. The Company made contributions to those plans of $26.1 million, $26.0 million and $15.1 million in 2020, 2019 and 2018, respectively. NOTE 18. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Kemper and Infinity sponsor other than pension postretirement employee benefit plans ("OPEB") that together provide medical, dental and/or life insurance benefits to approximately 575 retired and 500 active employees. Kemper has historically self-insured the benefits under the Kemper OPEB Plan. The Kemper medical plan generally provides for a limited number of years of medical insurance benefits at retirement based on the participant's attained age at retirement and number of years of service until specified dates and generally has required participant contributions, with most contributions adjusted annually. On December 30, 2016, Kemper amended the Kemper OPEB Plan and, effective December 31, 2016, will no longer offer coverage to post-65 Medicare-eligible retirees and Medicare-eligible spouses under the self-insured portion of its coverage. Rather, beginning on January 1, 2017, the Kemper OPEB Plan offers access to a private, third-party Medicare exchange and provides varying levels of a Company-determined subsidy via health reimbursement accounts to certain Medicare-eligible retirees and spouses in order to help fund a portion of the participants' cost. Further, the amendment eliminates the requirement for such participants to contribute to the Kemper OPEB Plan. In conjunction with the amendment, the Company recorded a pre-tax reduction to its Accumulated Postretirement Benefit Obligation of $11.0 million through Other Comprehensive Income. This prior service credit is being amortized into income over the remaining average life of the Kemper OPEB Plan's participants. Changes in Fair Value of Plans' Assets and Changes in Accumulated Postretirement Benefit Obligation for the years ended December 31, 2020 and 2019 were: DOLLARS IN MILLIONS 2020 2019 Fair Value of Plans' Assets at Beginning of Year $ - $ - Employer Contributions 1.5 1.1 Plan Participants' Contributions 0.2 0.3 Benefits Paid (1.7) (1.4) Fair Value of Plan Assets at End of Year - -
Accumulated Postretirement Benefit Obligation at Beginning of Year
12.8 15.0
Service Cost 0.2 0.2
Interest Cost 0.3 0.4
Plan Participants' Contributions 0.2 0.3
Benefits Paid (1.7) (1.4)
Actuarial Gain 1.9 (1.7)
Accumulated Postretirement Benefit Obligation at End of Year 13.7 12.8
Funded Status-Accumulated Postretirement Benefit Obligation in Excess of Plans' Assets
$ (13.7) $ (12.8)
Unamortized Actuarial Gain Reported in AOCI at End of Year
$ 18.7 $ 23.8
The measurement dates of the assets and liabilities at end of year in the preceding table under the headings "2020" and "2019" were December 31, 2020 and December 31, 2019, respectively.
120
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 18. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (Continued)
The weighted-average discount rate and rate of increase in future compensation
levels used to develop the components of the Accumulated Postretirement Benefit
Obligation at December 31, 2020 and 2019 were:
2020 2019
Discount Rate 2.13 % 2.91 %
Rate of Increase in Future Compensation Levels 2.20 2.20
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. The components of Comprehensive OPEB Expense (Income) for the years ended December 31, 2020, 2019 and 2018 were: DOLLARS IN MILLIONS 2020 2019 2018 Service Cost Earned During the Year $ 0.2
$ 0.2 $ 0.2 Interest Cost on Accumulated Postretirement Benefit Obligation
0.3 0.4 0.4
Amortization of Prior Service Credit (1.3) (1.3) (1.3)
Amortization of Accumulated Unrecognized OPEB Gain (1.9) (2.4) (1.8)
OPEB Income Recognized in Consolidated Statements of Income (2.7) (3.1) (2.5)
Unrecognized OPEB (Gain) Loss Arising During the Year 1.9 (1.7) (3.0)
Amortization of Prior Service Credit 1.3 1.3 1.3
Amortization of Accumulated Unrecognized OPEB Gain 1.9 2.4 1.8
Comprehensive OPEB (Income) Loss $ 2.4 $ (1.1) $ (2.4)
The Company estimates that OPEB Expense for the year ended December 31, 2021
will include income of $2.8 million resulting from the amortization of the
related accumulated actuarial gain and prior service credit included in AOCI at
December 31, 2020.
The weighted-average discount rate and rate of increase in future compensation
levels used to develop OPEB Expense for the years ended December 31, 2020, 2019
and 2018 were:
2020 2019 2018
Weighted-average Discount Rate 2.96 % 4.08 % 3.36 % Service Cost Discount Rate 2.94 4.16 3.52 Interest Cost Discount Rate 2.47 3.69 2.96
Rate of Increase in Future Compensation Levels 2.20 2.20
2.20
The Company expects to contribute $1.3 million, net of the expected Medicare Part D subsidy, to its OPEB Plan to fund benefit payments in 2021. The following benefit payments (net of participant contributions), which consider expected future service, as appropriate, are expected to be paid:
Years Ending December 31,
DOLLARS IN MILLIONS 2021 2022 2023 2024 2025 2026-2030
Estimated Benefit Payments:
Excluding Medicare Part D Subsidy $ 1.3 $ 1.3 $ 1.3 $ 1.3 $ 1.2 $ 4.6
Expected Medicare Part D Subsidy - - - - - -
Net Estimated Benefit Payments $ 1.3 $ 1.3 $ 1.3 $ 1.3 $ 1.2 $ 4.6
121
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 19. BUSINESS SEGMENTS
The Company is engaged, through its subsidiaries, in the property and casualty
insurance and life and health insurance businesses. The Company conducts its
operations through three operating segments: Specialty Property & Casualty
Insurance, Preferred Property & Casualty Insurance and Life & Health Insurance.
The Specialty Property & Casualty Insurance segment's principal products are
specialty automobile insurance and commercial automobile insurance. The
Preferred Property & Casualty Insurance segment's principal products are
preferred automobile insurance, homeowners insurance, and other personal
insurance. These products are distributed primarily through independent agents
and brokers.The Life & Health Insurance segment's principal products are
individual life, accident, health and property insurance. These products are
distributed by career agents employed by the Company and independent agents and
brokers.
The Company's earned premiums are derived in the United States . The accounting
policies of the segments are the same as those described in Note 2, "Summary of
Accounting Policies and Accounting Changes," to the Consolidated Financial
Statements. Capital expenditures for long-lived assets by operating segment are
immaterial.
It is the Company's management practice to allocate certain corporate expenses,
primarily compensation costs for corporate employees and related facility costs,
included in Interest and Other Expenses in the Consolidated Statements of Income
to its insurance operations. The amount of such allocated corporate expenses was
$109.5 million, $103.9 million and $68.0 million for the years ended
December 31, 2020, 2019 and 2018, respectively. The Company does not allocate
Income (Loss) from Change in Fair Value of Equity and Convertible Securities,
Net Realized Gains on Sales of Investments, Impairment Losses, Acquisition
Related Transaction, Integration and Other Costs, Loss from Early Extinguishment
of Debt, interest expense on debt or postretirement benefit plans, and actuarial
gains and losses on its postretirement benefit plans to its operating segments.
Additionally, the Company did not allocate the 2018 and 2017 impacts of the Tax
Act or the gains recognized in 2019 and 2018 on the partial satisfaction of a
final judgment against Computer Sciences Corporation ("CSC") to its operating
segments.
Segment Assets at December 31, 2020 and 2019 were:
DOLLARS IN MILLIONS 2020 2019
Specialty Property & Casualty Insurance $ 4,897.1 $ 4,435.2
Preferred Property & Casualty Insurance 1,711.2 1,549.8
Life & Health Insurance 6,457.0 5,847.9
Corporate and Other, Net 1,276.6 1,156.2
Total Assets $ 14,341.9 $ 12,989.1
Earned Premiums by product line for the years ended December 31, 2020, 2019 and
2018 were:
DOLLARS IN MILLIONS 2020 2019 2018
Specialty Property & Casualty Insurance: Specialty Automobile $ 3,031.3 $ 2,825.6 $ 1,889.5 Commercial Automobile 304.0 252.8
137.9
Preferred Property & Casualty Insurance:
Preferred Automobile 431.7 470.2 440.2
Homeowners 220.7 241.3 250.1
Other Personal Lines 35.8 38.8 40.4
Life & Health Insurance:
Life 385.7 384.6 378.4
Accident & Health 199.3 190.9 177.5
Property 63.7 68.2 70.4
Total Earned Premiums $ 4,672.2 $ 4,472.4 $ 3,384.4
122--------------------------------------------------------------------------------Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements NOTE 19. BUSINESS SEGMENTS (Continued) Segment Revenues, including a reconciliation to Total Revenues, for the years ended December 31, 2020, 2019 and 2018 were: DOLLARS IN MILLIONS 2020 2019 2018 Segment Revenues: Specialty Property & Casualty Insurance: Earned Premiums $ 3,335.3 $ 3,078.4 $ 2,027.4 Net Investment Income 114.1 107.5 63.4 Other Income 1.8 7.0 2.4 Total Specialty Property & Casualty Insurance 3,451.2 3,192.9 2,093.2 Preferred Property & Casualty Insurance: Earned Premiums 688.2 750.3 730.7 Net Investment Income 37.7 44.1 61.8 Other Income 0.1 - - Total Preferred Property & Casualty Insurance 726.0 794.4 792.5 Life & Health Insurance: Earned Premiums 648.7 643.7 626.3 Net Investment Income 198.8 206.4 210.9 Other Income 0.6 8.5 4.0 Total Life & Health Insurance 848.1 858.6 841.2 Total Segment Revenues 5,025.3 4,845.9 3,726.9
Income (Loss) from Change in Fair Value of Equity and Convertible Securities
72.1 138.9 (64.3)
Net Realized Gains on the Sales of Investments 38.1 41.9 26.4
Impairment Losses (19.5) (13.8) (4.5)
Other 89.7 26.3 40.6
Total Revenues $ 5,205.7 $ 5,039.2 $ 3,725.1
Segment Operating Profit, including a reconciliation to Income from Continuing
Operations before Income Taxes, for the years ended December 31, 2020, 2019 and
2018 was:
DOLLARS IN MILLIONS 2020 2019 2018
Segment Operating Profit (Loss):
Specialty Property & Casualty Insurance $ 420.9 $ 355.9 $ 145.6
Preferred Property & Casualty Insurance 1.8 52.3 28.6
Life & Health Insurance 71.2 121.9 115.9
Total Segment Operating Profit 493.9 530.1 290.1
Corporate and Other Operating Profit (Loss) From:
Partial Satisfaction of Judgment 89.4 20.1 35.7
Other (36.5) (31.4) (39.6)
Corporate and Other Operating Profit (Loss) 52.9 (11.3) (3.9)
Adjusted Consolidated Operating Profit (Loss) 546.8 518.8 286.2
Income (Loss) from Change in Fair Value of Equity and Convertible Securities
72.1 138.9 (64.3)
Net Realized Gains on Sales of Investments 38.1 41.9 26.4
Impairment Losses (19.5) (13.8) (4.5)
Acquisition Related Transaction, Integration and Other Costs (63.3)
(18.4) (44.7)
Pension Obligation Settlement Costs (64.1) - -
Loss from Early Extinguishment of Debt - (5.8) -
Income from Continuing Operations before Income Taxes $ 510.1 $ 661.6 $ 199.1
123
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 19. BUSINESS SEGMENTS (Continued)
Segment Net Operating Income, including a reconciliation to Income from
Continuing Operations, for the years ended December 31, 2020, 2019 and 2018 was:
DOLLARS IN MILLIONS 2020 2019 2018
Segment Net Operating Income (Loss):
Specialty Property & Casualty Insurance $ 337.9 $ 283.1 $ 115.8
Preferred Property & Casualty Insurance 3.5 41.9 25.7
Life & Health Insurance 60.0 98.7 91.5
Total Segment Net Operating Income (Loss) 401.4 423.7 233.0
Corporate and Other Net Operating Income (Loss) From: Effects of Tax Law Changes
- - 26.4
Partial Satisfaction of Judgment 70.6 15.9 28.2
Other (33.2) (21.3) (29.2)
Total Corporate and Other Net Operating Income (Loss) 37.4 (5.4) 25.4
Adjusted Consolidated Net Operating Income 438.8 418.3 258.4
Net Income (Loss) From:
Change in Fair Value of Equity and Convertible Securities 57.0 109.7 (50.8)
Net Realized Gains on Sales of Investments 30.1 33.1 20.9
Impairment Losses (15.4) (10.9) (3.6)
Acquisition Related Transaction, Integration and Other Costs (50.0)
(14.5) (36.5)
Pension Obligation Settlement Costs (50.6) - -
Loss from Early Extinguishment of Debt - (4.6) -
Income from Continuing Operations $ 409.9 $ 531.1 $ 188.4
NOTE 20. CATASTROPHE REINSURANCE
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.
The Company 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 certain regions, and
reinsurance. To limit its exposures to catastrophic events, the Company
maintains a catastrophe reinsurance program for the property and casualty
insurance companies. In 2020, the property business written through the Life &
Health segment was included in the catastrophe reinsurance program. Coverage for
the catastrophe reinsurance program is provided in various layers through
multiple excess of loss reinsurance contracts and an annual aggregate excess
property catastrophe reinsurance contract.
124
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 20. CATASTROPHE REINSURANCE (Continued)
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.
Catastrophe Losses and
LAE Percentage
DOLLARS IN MILLIONS In Excess of Up to of Coverage
Retained $ - $ 50.0 - %
1st Layer of Coverage 50.0 150.0 95.0
2nd Layer of Coverage 150.0 250.0 95.0
3rd Layer of Coverage 250.0 275.0 95.0
Coverage on individual catastrophes provided under the excess of loss reinsurance contracts effective January 1, 2019 to December 31, 2019 is provided in various layers as presented below.
Catastrophe Losses and
LAE Percentage
DOLLARS IN MILLIONS In Excess of Up to of Coverage
Retained $ - $ 50.0 - %
1st Layer of Coverage 50.0 150.0 95.0
2nd Layer of Coverage 150.0 250.0 95.0
3rd Layer of Coverage 250.0 275.0 95.0
Coverage on individual catastrophes provided under the excess of loss reinsurance contracts effective January 1, 2018 to December 31, 2018 is provided in various layers as presented below.
Catastrophe Losses and
LAE Percentage
DOLLARS IN MILLIONS In Excess of Up to of Coverage
Retained $ - $ 50.0 - %
1st Layer of Coverage 50.0 150.0 95.0
2nd Layer of Coverage (Tranche A) 150.0 250.0 63.3
2nd Layer of Coverage (Tranche B) 150.0 350.0
31.7
In the event that the incurred catastrophe losses and LAE covered by the
catastrophe reinsurance programs presented in the three preceding tables exceed
the retention for that particular layer, each of the programs allow for one
reinstatement of such coverage. In such an instance, the Company is required to
pay a reinstatement premium to the reinsurers to reinstate the full amount of
reinsurance available under such layer.
Coverage provided under the 2020 aggregate property catastrophe reinsurance
contract is summarized below.
Aggregate Catastrophe
Losses and LAE
DOLLARS IN MILLIONS In Excess of Up to
Retained $ - $ 60.0
Coverage 60.0 110.0
125-------------------------------------------------------------------------------- Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements
NOTE 20. CATASTROPHE REINSURANCE (Continued) Coverage provided under the 2019 aggregate property catastrophe reinsurance contract is summarized below.
Aggregate Catastrophe
Losses and LAE
DOLLARS IN MILLIONS In Excess of Up to
Retained $ - $ 60.0
Coverage 60.0 110.0
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.
Reinsurance premiums for the Company's catastrophe reinsurance programs and the
FHCF Program reduced earned premiums for the years ended December 31, 2020, 2019
and 2018 by the following:
DOLLARS IN MILLIONS 2020 2019 2018
Specialty Property & Casualty Insurance $ 4.8 $ 0.2 $ 2.6 Preferred Property & Casualty Insurance 20.7 20.2
17.8
Life & Health Insurance 1.2 0.1
0.1
Total Ceded Catastrophe Reinsurance Premiums $ 26.7 $ 20.5 $ 20.5
In 2020, 2019 and 2018 the Company paid $0.0 million, $0.0 million and $0.4 million respectively, in reinstatement premium. 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. DOLLARS IN MILLIONS 2020 2019
2018
Specialty Property & Casualty Insurance $ 12.5 $ 11.6 $ 4.4 Preferred Property & Casualty Insurance 81.5 44.6 79.1 Life & Health Insurance 12.9 3.9
4.1
Total Catastrophe Losses and LAE $ 106.9 $ 60.1 $
87.6
In 2018, the Company had reinsurance recoveries of $31.8 million under its
catastrophe reinsurance programs primarily driven by the 2017 and 2018
California wildfires. In 2019, the Company entered into a sale of subrogation
rights resulting in a reduction of the reinsurance recoveries of $15.5 million.
In 2020, the reinsurance recoveries were further reduced by $1.5 million. The
Life & Health Insurance segment had reinsurance recoveries of $0.0 million, $1.6
million and $1.6 million from the FHCF in 2020, 2019, and 2018, respectively.
Total catastrophe loss and LAE reserves, net of reinsurance recoverables,
developed adversely by $0.2 million in 2020 and developed favorably by, $17.1
million and $8.4 million in 2019 and 2018, respectively. The Specialty Property
& Casualty Insurance segment reported adverse catastrophe reserve development of
$0.2 million and $0.5 million in 2020 and 2019, respectively and favorable
catastrophe reserve development of $0.3 million in 2018. The Preferred Property
& Casualty Insurance segment reported favorable catastrophe reserve development
of $0.5 million, $18.4 million and $8.2 million in 2020, 2019 and 2018,
respectively. The Life & Health Insurance segment reported adverse catastrophe
reserve development of $0.5 million, $0.8 million, and $0.1 million in 2020,
2019 and 2018, respectively.
The process of estimating and establishing reserves for catastrophe losses is
inherently uncertain and the actual ultimate cost of a claim, net of actual
reinsurance recoveries, may vary materially from the estimated amount reserved.
The Company's estimates of direct catastrophe losses are generally based on
inspections by claims adjusters and historical loss development experience for
areas that have not been inspected or for claims that have not yet been
reported. The Company's estimates of direct catastrophe losses are based on the
coverages provided by its insurance policies. The Company's homeowners and
dwelling insurance policies do not provide coverage for losses caused by floods,
but generally provide coverage for physical damage caused by wind or wind-driven
rain. Accordingly, the Company's estimates of direct losses for homeowners and
126
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 20. CATASTROPHE REINSURANCE (Continued)
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.
NOTE 21. OTHER REINSURANCE
In addition to the reinsurance programs described in Note 20, "Catastrophe
Reinsurance," to the Consolidated Financial Statements, Kemper's insurance
subsidiaries utilize other reinsurance arrangements to limit their maximum loss,
provide greater diversification of risk and to minimize exposures on larger
risks. The ceding of insurance does not discharge the primary liability of the
original insurer. Accordingly, insurance reserve liabilities are reported gross
of any estimated recovery from reinsurers in the Consolidated Balance Sheets.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the insurance reserve liability and are included in Other Receivables in the
Consolidated Balance Sheets.
Earned Premiums ceded on long-duration and short-duration policies were $31.2
million, $27.4 million and $31.6 million for the years ended December 31, 2020,
2019 and 2018, respectively, of which $26.7 million, $20.5 million and $20.5
million, respectively, was related to catastrophe reinsurance. See Note 20,
"Catastrophe Reinsurance," to the Consolidated Financial Statements for
additional information regarding the Company's catastrophe reinsurance programs.
Certain insurance subsidiaries assume business from other insurance companies
and involuntary pools. Earned Premiums assumed on long-duration and
short-duration policies were $73.8 million, $92.3 million and $85.2 million for
the years ended December 31, 2020, 2019 and 2018, respectively.
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.
Five employees of the Company serve as directors of Capitol's five member board
of directors. Nine employees of the Company also serve as directors of ORCC's
nine member board of directors. Kemper's subsidiary, United Insurance, provides
claims and administrative services to Capitol and ORCC. In addition, agents
appointed by Kemper's subsidiary, The Reliable Life Insurance Company, and who
are employed by United Insurance, are also appointed by Capitol and ORCC to sell
property insurance products for the Company's Life & Health Insurance segment.
The Company also provides certain investment services to Capitol and ORCC.
NOTE 22. FAIR VALUE MEASUREMENTS
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.
127
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 22. FAIR VALUE MEASUREMENTS (Continued)
The valuation of assets measured at fair value in the Company's Consolidated
Balance Sheet at December 31, 2020 is summarized below. The Company has no
material liabilities that are measured and reported at fair value.
Fair Value Measurements
Quoted Prices Significant
in Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs Measured at Net Total
DOLLARS IN MILLIONS (Level 1) (Level 2) (Level 3) Asset Value Fair Value
Fixed Maturities:
U.S. Government and Government
Agencies and Authorities $ 134.0 $ 451.3 $ - $ - $ 585.3
States and Political Subdivisions - 1,589.5 - - 1,589.5
Foreign Governments - 5.2 - - 5.2
Corporate Securities:
Bonds and Notes - 3,992.4 433.0 - 4,425.4
Redeemable Preferred Stocks - 1.3 6.2 - 7.5
Collateralized Loan Obligations - 767.7 - - 767.7
Other Mortgage- and Asset-backed - 215.3 10.0 - 225.3
Total Investments in Fixed Maturities 134.0 7,022.7 449.2 - 7,605.9
Equity Securities at Fair Value:
Preferred Stocks:
Finance, Insurance and Real Estate - 43.7 - - 43.7
Other Industries - 15.4 - - 15.4
Common Stocks:
Finance, Insurance and Real Estate 8.7 1.7 - - 10.4
Other Industries 0.4 - - - 0.4
Other Equity Interests:
Exchange Traded Funds 496.4 - - - 496.4
Limited Liability Companies and
Limited Partnerships - - - 292.2 292.2
Total Investments in Equity Securities
at Fair Value 505.5 60.8 - 292.2 858.5
Convertible Securities at Fair Value - 39.9 - - 39.9
Total $ 639.5 $ 7,123.4 $ 449.2 $ 292.2 $ 8,504.3
128
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 22. FAIR VALUE MEASUREMENTS (Continued)
At December 31, 2020, the Company had unfunded commitments to invest an
additional $130.8 million in certain limited liability investment companies and
limited partnerships that will be included in Other Equity Interests when
funded.
The valuation of assets measured at fair value in the Company's Consolidated
Balance Sheet at December 31, 2019 is summarized below.
Fair Value Measurements
Quoted Prices Significant
in Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs Measured at Net Total
DOLLARS IN MILLIONS (Level 1) (Level 2) (Level 3) Asset Value Fair Value
Fixed Maturities:
U.S. Government and Government
Agencies and Authorities $ 144.3 $ 671.6 $ - $ - $ 815.9
States and Political Subdivisions - 1,515.8 - - 1,515.8
Foreign Governments - 16.8 - - 16.8
Corporate Securities:
Bonds and Notes - 3,450.6 409.1 - 3,859.7
Redeemable Preferred Stocks - - 6.7 - 6.7
Collateralized Loan Obligations - - 618.2 - 618.2
Other Mortgage- and Asset-backed - 78.8 10.2 - 89.0
Total Investments in Fixed Maturities 144.3 5,733.6 1,044.2 - 6,922.1
Equity Securities at Fair Value:
Preferred Stocks:
Finance, Insurance and Real Estate - 44.5 - - 44.5
Other Industries 0.9 13.8 - - 14.7
Common Stocks:
Finance, Insurance and Real Estate 12.8 - - - 12.8
Other Industries 0.2 0.2 - - 0.4
Other Equity Interests:
Exchange Traded Funds 586.8 - - - 586.8
Limited Liability Companies and
Limited Partnerships - - - 248.1 248.1
Total Investments in Equity
Securities at Fair Value 600.7 58.5 - 248.1 907.3
Convertible Securities at Fair Value - 37.3 - - 37.3
Total $ 745.0 $ 5,829.4 $ 1,044.2 $ 248.1 $ 7,866.7
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
129
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 22. FAIR VALUE MEASUREMENTS (Continued)
to prepare evaluations. In addition, the provider uses model processes to
develop prepayment and interest rate scenarios. The pricing provider's models
and processes also take into account market convention. For each asset class,
teams of its evaluators gather information from market sources and integrate
relevant credit information, perceived market movements and sector news into the
evaluated pricing applications and models. The Company generally validates the
measurements obtained from its primary pricing provider by comparing them with
measurements obtained from one additional pricing provider that provides either
prices from recent market transactions, quotes in inactive markets or
evaluations based on its own proprietary models.
The Company investigates significant differences related to the values provided.
On completion of its investigation, management exercises judgment to determine
the price selected and whether adjustments, if any, to the price obtained from
the Company's primary pricing provider would warrant classification of the price
as Level 3. In instances where a measurement cannot be obtained from either
pricing provider, the Company generally will evaluate bid prices from one or
more binding quotes obtained from market makers to value investments in inactive
markets and classified by the Company as Level 2. The Company generally
classifies securities when it receives non-binding quotes or indications as
Level 3 securities unless the Company can validate the quote or indication
against recent transactions in the market.
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.
DOLLARS IN MILLIONS Unobservable Input Total Fair Value Range of Unobservable Inputs Weighted-average Yield
Investment-grade Market Yield $ 246.7 1.4 % - 13.0 % 3.8 %
Non-investment-grade:
Senior Debt Market Yield 111.1 2.4 - 23.4 9.5
Junior Debt Market Yield 64.6 3.1 - 27.9 13.7
Other Various 26.8
Total Level 3 Fixed Maturity Investments in
Corporate Securities $ 449.2
The table below presents quantitative information about the significant
unobservable inputs utilized by the Company in determining fair values for fixed
maturity investments in corporate securities classified as Level 3 at
December 31, 2019.
Total
DOLLARS IN MILLIONS Unobservable Input Fair Value Range of Unobservable Inputs Weighted-average Yield
Investment-grade Market Yield $ 204.2 2.4 % - 8.5 % 4.1 %
Non-investment-grade:
Senior Debt Market Yield 123.7 2.4 - 21.5 9.1
Junior Debt Market Yield 81.3 9.6 - 18.0 13.1
Collateralized Loan Obligations (investment-grade
and non-investment-grade) Market Yield 613.5 3.2 - 12.5 5.1
Other Various 21.5
Total Level 3 Fixed Maturity Investments in
Corporate Securities $ 1,044.2
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.
130
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 22. FAIR VALUE MEASUREMENTS (Continued)
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.
Fixed Maturities
Corporate
Bonds States and Redeemable Other Mortgage-
and Political Preferred Collateralized Loan and Asset-
DOLLARS IN MILLIONS Notes Sub-divisions Stocks Obligations backed Total
Balance at Beginning of Year $ 409.1 $ - $ 6.7 $ 618.2 $ 10.2 $ 1,044.2
Total Gains (Losses):
Included in Consolidated Statement of
Income (9.0) - - (0.3) - (9.3)
Included in Other Comprehensive Income
(Loss) 3.2 0.1 0.5 (9.3) 0.4 (5.1)
Purchases 185.9 0.6 0.2 53.5 - 240.2
Settlements - - - - (0.1) (0.1)
Sales (165.2) - - (26.4) (0.5) (192.1)
Transfers into Level 3 9.0 - - - - 9.0
Transfers out of Level 3 - (0.7) (1.2) (635.7) - (637.6)
Balance at End of Year $ 433.0 $ - $ 6.2 $ - $ 10.0 $ 449.2
The Company's policy is to recognize transfers between levels as of the end of
the reporting period. There were no transfers between Levels 1 and 2 for the
year ended December 31, 2020. Transfers into Level 3 of $9.0 million for the
year ended December 31, 2020 were due to changes in the availability of market
observable inputs. There were $637.6 million transfers out of Level 3 for the
year ended December 31, 2020 due to availability of market observable inputs
primarily within the collateralized loan obligations.
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.
Fixed Maturities
Corporate Redeemable Other Mortgage-
Bonds and Preferred Collateralized Loan and Asset-
DOLLARS IN MILLIONS Notes Stocks Obligations backed Total
Balance at Beginning of Year $ 382.6 $ - $ 504.9 $ 9.9 $ 897.4
Total Gains (Losses):
Included in Consolidated Statement of
Income (6.8) - 0.6 - (6.2)
Included in Other Comprehensive Income
(Loss) 10.6 (0.1) 5.3 1.0 16.8
Purchases 307.0 6.8 119.2 - 433.0
Settlements (72.9) - (28.0) (0.7) (101.6)
Sales (211.4) - (2.9) - (214.3)
Transfers into Level 3 - - 19.1 - 19.1
Transfers out of Level 3 - - - - -
Balance at End of Year $ 409.1 $ 6.7 $ 618.2 $ 10.2 $ 1,044.2
There were no transfers between Levels 1 and 2 for the year ended December 31,
2019. Transfers into Level 3 of $19.1 million for the year ended December 31,
2019 were due to changes in the availability of market observable inputs. There
were no transfer out of Level 3 for the year ended December 31, 2019.
131
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 22. FAIR VALUE MEASUREMENTS (Continued)
Presented below are the carrying values and fair value estimates of financial instruments not carried at fair value.
December 31, 2020 December 31, 2019
(Dollars in Millions) Carrying Value Fair Value Carrying Value Fair Value
Financial Assets:
Loans to Policyholders $ 297.9 $ 297.9 $ 305.6 $ 612.4
Short-term Investments 875.4 875.4 470.9 470.9
Mortgage Loans 54.6 54.6 27.5 27.5
Financial Liabilities:
Debt 1,172.8 1,247.8 778.4 820.2
Policyholder Obligations 407.8 407.8 243.4 243.4
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.
NOTE 23. CONTINGENCIES
In the ordinary course of its businesses, the Company is involved in legal
proceedings, including lawsuits, arbitrations, investigations, regulatory
examinations, audits and inquiries. Except with regard to matters discussed
below, based on currently available information, the Company does not believe
that it is reasonably possible that any of its pending legal proceedings will
have a material effect on the Company's consolidated financial statements.
Over the last decade there have been initiatives that intend, in various ways,
to impose new duties on life insurance companies to proactively search for
information related to the deaths of their insureds. These initiatives, which
include legislation, audits, regulatory examinations and litigation, seek to
alter the terms of life insurance contracts by imposing requirements that did
not exist and were not contemplated at the time the issuing companies entered
into such contracts.
In 2016, the Company voluntarily began implementing a comprehensive process to
compare the life insurance records of its life insurance subsidiaries against
one or more death verification databases to determine if any of its insureds may
be deceased; the process is continuing.
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.
Gain Contingency
In 2015, Kemper's subsidiary, Kemper Corporate Services, Inc. ("KCSI"), filed a
demand for arbitration with the American Arbitration Association ("AAA") against
CSC, claiming that CSC had breached the terms of a master software license and
services agreement and related agreements (collectively, the "Agreements") by
failing, among other things, to timely produce and deliver certain software to
KCSI. In April 2017, CSC merged with a spin-off of the Enterprise Services
business of Hewlett Packard Enterprise Company and is now known as DXC
Technology Company.
In April 2017, the parties participated in an evidentiary hearing before a
AAA-appointed arbitrator. In November 2017, the arbitrator awarded KCSI direct
damages against CSC of $84.3 million, prejudgment interest at the annual rate of
9% and costs and expenses in the amount of $7.2 million.
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 23. CONTINGENCIES (Continued)
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.
NOTE 24. RELATED PARTIES
Mr. Christopher B. Sarofim, a director of Kemper, is Vice Chairman and a member
of the board of directors of Fayez Sarofim & Co. ("FS&C"), a registered
investment advisory firm. The Company's defined benefit pension plan had $64.7
million, $149.3 million and $124.5 million in assets managed by FS&C at
December 31, 2020, 2019 and 2018, respectively, under an agreement with FS&C
whereby FS&C provides investment management services with respect to certain
funds of the plan. Investment Expenses incurred in connection with such
agreement were $0.7 million, $0.9 million, and $0.9 million for the years ended
December 31, 2020, 2019 and 2018, respectively. The Company believes that the
services described above have been provided on terms no less favorable to the
Company than could have been negotiated with non-affiliated third parties.
As described in Note 21, "Other Reinsurance," to the Consolidated Financial
Statements, the Company also has certain relationships with Capitol, a mutual
insurance company that is owned by its policyholders, and its subsidiary, ORCC.
133-------------------------------------------------------------------------------- Kemper Corporation and Subsidiaries Notes to the Consolidated Financial Statements
NOTE 25. QUARTERLY FINANCIAL INFORMATION (Unaudited)
Three Months Ended (Unaudited) Year Ended
Mar 31, Jun 30, Sep 30, Dec 31, Dec 31,
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS 2020 2020 2020 2020 2020
Revenues:
Earned Premiums $ 1,166.4 $
1,085.3 $ 1,206.5 $ 1,214.0 $ 4,672.2 Net Investment Income
85.6 67.8 92.1 102.7 348.2
Other Income 90.3 1.5 0.9 1.9 94.6
Income (Loss) from Changes in Fair Value of
Equity and Convertible Securities (117.8) 71.6 45.2 73.1 72.1
Net Realized Gains on Sales of Investments 16.5 11.7 10.0 (0.1) 38.1
Impairment Losses (12.0) (7.0) (1.0) 0.5 (19.5)
Total Revenues 1,229.0 1,230.9 1,353.7 1,392.1 5,205.7
Expenses:
Policyholders' Benefits and Incurred Losses
and Loss Adjustment Expenses 835.2 747.5 877.5 863.4 3,323.6
Insurance Expenses 271.6 272.7 276.9 279.3 1,100.5
Interest and Other Expenses 44.5 51.0 47.2 128.8 271.5
Total Expenses 1,151.3 1,071.2 1,201.6 1,271.5 4,695.6
Income from Continuing Operations before
Income Taxes 77.7 159.7 152.1 120.6 510.1
Income Tax Expense (13.7) (33.6) (29.8) (23.1) (100.2)
Income from Continuing Operations 64.0 126.1 122.3 97.5 409.9
Net Income $ 64.0 $ 126.1 $ 122.3 $ 97.5 $ 409.9
Net Income (Loss) Per Unrestricted Share:
Basic $ 0.96 $ 1.93 $ 1.87 $ 1.49 $ 6.24 Diluted
$ 0.95 $ 1.91 $ 1.83 $ 1.46 $ 6.14 Dividends Paid to Shareholders Per Share
$ 0.30 $ 0.30 $ 0.30 $ 0.30 $ 1.20
The sum of quarterly per share amounts may not equal per share amounts for the year due to differences in weighted-average shares and/or equivalent shares outstanding for each of the periods presented.
134
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Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 25. QUARTERLY FINANCIAL INFORMATION (Unaudited) (Continued)
Three Months Ended (Unaudited) Year Ended
Mar 31, Jun 30, Sep 30, Dec 31, Dec 31,
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS 2019 2019 2019 2019 2019
Revenues:
Earned Premiums $ 1,074.8
$ 1,116.6 $ 1,135.2 $ 1,145.8 $ 4,472.4 Net Investment Income
82.7 96.0 91.7 93.9 364.3
Other Income 1.9 22.7 7.2 3.7 35.5
Income (Loss) from Changes in Fair Value of Equity and Convertible Securities
64.4 25.5 9.8 39.2 138.9
Net Realized Gains on Sales of Investments 16.1 21.3 1.7 2.8 41.9
Impairment Losses (3.6) (6.7) (1.8) (1.7) (13.8)
Total Revenues 1,236.3 1,275.4 1,243.8 1,283.7 5,039.2
Expenses:
Policyholders' Benefits and Incurred Losses and
Loss Adjustment Expenses 765.4 825.4 782.6 814.9 3,188.3
Insurance Expenses 234.8 263.5 256.0 265.4 1,019.7
Loss from Early Extinguishment of Debt - - 5.8 - 5.8
Interest and Other Expenses 41.4 38.0 37.9 46.5 163.8
Total Expenses 1,041.6 1,126.9 1,082.3 1,126.8 4,377.6
Income (Loss) from Continuing Operations before
Income Taxes 194.7 148.5 161.5 156.9 661.6
Income Tax Benefit (Expense) (39.4) (26.4) (32.5) (32.2) (130.5)
Net Income $ 155.3 $ 122.1 $ 129.0 $ 124.7 $ 531.1
Income from Continuing Operations Per Unrestricted
Share:
Basic $ 2.38 $ 1.87 $ 1.93 $ 1.87 $ 8.04
Diluted $ 2.35 $ 1.84 $ 1.91 $ 1.85 $ 7.96 Net Income Per Unrestricted Share: Basic
$ 2.38 $ 1.87 $ 1.93 $ 1.87 $ 8.04 Diluted
$ 2.35 $ 1.84 $ 1.91 $ 1.85 $ 7.96 Dividends Paid to Shareholders Per Share
$ 0.25 $ 0.25 $ 0.25 $ 0.28 $ 1.03
The sum of quarterly per share amounts may not equal per share amounts for the year due to differences in weighted-average shares and/or equivalent shares outstanding for each of the periods presented.
135
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Report of Independent Registered
Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Kemper Corporation
Opinions on the Financial Statements and Internal Control over Financial
Reporting
We have audited the accompanying consolidated balance sheets of Kemper
Corporation and subsidiaries (the "Company") as of December 31, 2020 and 2019,
the related consolidated statements of income, comprehensive income (loss),
shareholders' equity, and cash flows, for each of the three years in the period
ended December 31, 2020, and the related notes and the schedules listed in the
Index at Item 15 (collectively referred to as the "financial statements"). We
also have audited the Company's internal control over financial reporting as of
December 31, 2020, based on criteria established in Internal Control- Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2020 and 2019, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2020, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2020, based on
criteria established in Internal Control - Integrated Framework (2013) issued by
COSO.
Change in Accounting Principle
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.
Basis for Opinions
The Company's management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on these
financial statements and an opinion on the Company's internal control over
financial reporting based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures to respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial statements. Our
audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
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Report of Independent Registered
Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Continued)
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the
current-period audit of the financial statements that were communicated or
required to be communicated to the audit committee and that (1) relate to
accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on
the financial statements, taken as a whole, and we are not, by communicating the
critical audit matters below, providing separate opinions on the critical audit
matters or on the accounts or disclosures to which they relate.
Property and Casualty Insurance Reserves - Refer to Notes 2 and 6 to the
consolidated financial statements
Critical Audit Matter Description
The estimation of property and casualty insurance reserves for losses and loss
adjustment expenses ("property and casualty insurance reserves"), including
those claims that are incurred but not reported, requires significant judgment.
Estimating property and casualty insurance reserves is inherently uncertain as
estimates are generally derived using a variety of actuarial estimation
techniques that are dependent on assumptions and expectations about future
events, many of which are difficult to quantify. The estimation process,
particularly for claims with longer-tailed exposures that may not be discovered
or reported immediately, is an inherently subjective exercise and modest changes
in judgments and assumptions can materially impact the valuation of these
reserves.
Given the significant judgments made by management in estimating property and
casualty insurance reserves, auditing property and casualty insurance reserves
required a high degree of auditor judgment and an increased extent of effort,
including the involvement of our actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
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 tested the underlying data, including historical claims, that served as the
basis for the actuarial analyses to test that the inputs to the actuarial
estimates were accurate and complete.
•With the assistance of our actuarial specialists:
•We developed a range of independent estimates of the property and casualty
insurance reserves and compared our estimates to the recorded reserves.
•We compared our prior year estimates of expected incurred losses to actual
experience during the most recent year to identify potential bias in the
Company's determination of property and casualty insurance reserves.
Fixed Maturities at Fair Value - Refer to Notes 2, 4 and 22 to the consolidated
financial statements
Critical Audit Matter Description
Investments in fixed maturity securities classified as available-for-sale are
reported at fair value in the financial statements. Fixed maturity securities
without readily determinable market values are valued using significant
unobservable inputs, such as credit profile, credit spread and resulting market
yield, which involve considerable judgment by management.
Given management uses significant unobservable inputs to estimate the fair value
of fixed maturity securities without readily determinable market values,
performing audit procedures to evaluate these inputs required a high degree of
auditor judgment and an increased extent of effort, including the need to
involve our fair value specialists.
137
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Report of Independent Registered
Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Continued)
How the Critical Audit Matter Was Addressed in the Audit
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 tested the effectiveness of controls related to fixed maturity securities,
including those controls related to the determination of fair value.
•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.
•We evaluated the reasonableness of the models, methodologies, and unobservable
inputs used by management to estimate fair value.
•With the assistance of our fair value specialists, we compared management's
unobservable inputs to external sources, and for a sample of the investments,
developed independent estimates of the fair value and compared our estimates to
the Company's estimates.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 10, 2021
We have served as the Company's auditor since 2002.
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