KEMPER CORPORATION Summary of Results Net Income was$60.6 million ($0.93 per unrestricted common share) for the six months endedJune 30, 2021 , compared to$190.1 million ($2.88 per unrestricted common share) for the same period in 2020. Net Income (Loss) was$(62.6) million $(0.97) per unrestricted common share) for the three months endedJune 30, 2021 , compared to$126.1 million ($1.93 per unrestricted common share) for the same period in 2020. Beginning inMarch 2020 , the global pandemic associated with COVID-19 and related economic conditions began to impact the Company's results of operations. The Company incurred additional expenses associated with COVID-19 and related economic conditions. For further discussion regarding the potential impacts of COVID-19 and related economic conditions on the Company, see "Caution Regarding Forward-Looking Statements" beginning on page 1and Item 1A., Risk Factors, of Part II of this Quarterly Report on Form 10-Q. A reconciliation of Net Income (Loss) to Adjusted Consolidated Net Operating Income (Loss) (a non-GAAP financial measure) for the six and three months endedJune 30, 2021 and 2020 is presented below. Six Months Ended Three Months Ended (Dollars in Millions and Net of Income Jun 30, Jun 30, Increase Jun 30, Jun 30, Increase Taxes) 2021 2020 (Decrease) 2021 2020 (Decrease) Net Income (Loss)$ 60.6 $ 190.1 $ (129.5) $ (62.6) $ 126.1 $ (188.7) Less: Income (Loss) from Change in Fair Value of Equity and Convertible Securities 73.5 (36.5) 110.0 32.3 56.6 (24.3) Net Realized Gains on Sales of Investments 26.1 22.3 3.8 15.2 9.3 5.9 Impairment Losses (5.7) (15.0) 9.3 (2.5) (5.5) 3.0 Acquisition Related Transaction, Integration and Other Costs (21.1) (22.8) 1.7 (8.2) (13.5) 5.3 Adjusted Consolidated Net Operating Income (Loss)$ (12.2) $ 242.1
Components of Adjusted Consolidated Net Operating Income (Loss): Segment Net Operating Income (Loss): Specialty Property & Casualty Insurance$ (11.6) $ 127.6
1.3 19.3 (18.0) (8.3) 0.9 (9.2)
Life & Health Insurance 20.3 38.4 (18.1) 13.0 16.1 (3.1)
Total Segment Net Operating Income (Loss) 10.0 185.3 (175.3) (87.0) 84.5 (171.5)
Corporate and Other Net Operating Income
(Loss) From:
Partial Satisfaction of Judgment - 70.6 (70.6) - - -
Other (22.2) (13.8) (8.4) (12.4) (5.3) (7.1)
Corporate and Other Net Operating Income
(Loss) (22.2) 56.8 (79.0) (12.4) (5.3) (7.1)
Adjusted Consolidated Net Operating Income
(Loss) $ (12.2) $ 242.1 $ (254.3) $ (99.4) $ 79.2 $ (178.6)
Net Income (Loss)
Net Income decreased by $129.5 million for the six months ended June 30, 2021 ,
compared to the same period in 2020, due primarily to lower Adjusted
Consolidated Net Operating Income, partially offset by income from change in
fair value of equity and convertible securities. Adjusted Consolidated Net
Operating Income decreased by $254.3 million for the six months ended June 30,
2021 , compared to the same period in 2020, due primarily to lower Specialty
Property & Casualty Segment Insurance Net Operating Income, Corporate and Other
Net Operating Income, Life & Health Insurance Segment Net Operating Income, and
Preferred Property & Casualty Insurance Segment Net Operating Income.
40
--------------------------------------------------------------------------------Summary of Results (continued)
See MD&A, "Specialty Property & Casualty Insurance ", "Preferred Property & Casualty Insurance " and "Life & Health Insurance ," for discussion of each respective segment's results. Corporate and Other Net Operating Income decreased due primarily to a gain recognized in 2020 for the satisfaction of the remaining balance of a final judgment received by the Company in connection with an arbitration award againstComputer Sciences Corporation (the "CSC Judgment"). The Company's investment results were favorable in 2021, compared to 2020, by a$110.0 million after-tax increase from the change in fair value of the equity and convertible securities, a$9.3 million after-tax decrease from impairment losses and a$3.8 million after-tax increase from net realized gains on sales of investments. See MD&A, "Investment Results," for additional discussion. Net Income decreased by$188.7 million for the three months endedJune 30, 2021 , compared to the same period in 2020, due primarily to lower Adjusted Consolidated Net Operating Income and lower income from change in fair value of equity and convertible securities. Adjusted Consolidated Net Operating Income decreased by$178.6 million for the three months endedJune 30, 2021 , compared to the same period in 2020, due primarily to lower Specialty Property & Casualty Segment Insurance Net Operating Income,Preferred Property & Casualty Insurance Segment Net Operating Income, Corporate and Other Net Operating Income, and Life & Health Insurance Segment Net Operating Income. See MD&A, "Specialty Property & Casualty Insurance ", "Preferred Property & Casualty Insurance " and "Life & Health Insurance ," for discussion of each respective segment's results.
Revenues
Earned Premiums were$2,538.5 million for the six months endedJune 30, 2021 , compared to$2,251.7 million for the same period in 2020, an increase of$286.8 million . Earned Premiums in theSpecialty Property & Casualty Insurance segment increased by$306.4 million for the six months endedJune 30, 2021 , compared to the same period in 2020. Earned Premiums in thePreferred Property & Casualty Insurance segments decreased by$19.1 million for the six months endedJune 30, 2021 , compared to the same period in 2020. See MD&A, "Specialty Property & Casualty Insurance " and "Preferred Property & Casualty Insurance ", for discussion of the changes in each segment's earned premiums. Earned Premiums were$1,337.7 million for the three months endedJune 30, 2021 , compared to$1,085.3 million for the same period in 2020, an increase of$252.4 million . Earned Premiums in theSpecialty Property & Casualty Insurance segment increased by$251.3 million for the three months endedJune 30, 2021 , compared to the same period in 2020. Earned Premiums in thePreferred Property & Casualty Insurance segments decreased by$0.4 million for the three months endedJune 30, 2021 , compared to the same period in 2020. 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 increased by$63.6 million for the six months endedJune 30, 2021 , compared to the same period in 2020, due primarily to an increase in return from Alternative Investments and higher levels of investments in fixed income securities, partially offset by lower yields on fixed income securities. Increase in Other Net Investment Income is driven by income fromCompany-Owned Life Insurance due to higher average investment balance and rate. Net Investment Income increased by$46.1 million for the three months endedJune 30, 2021 , compared to the same period in 2020, due primarily to an increase in return from Alternative Investments and higher levels of investments in fixed income securities, partially offset by lower yields on fixed income securities. Increase in Other Net Investment Income is driven by income fromCompany-Owned Life Insurance due to higher average investment balance and rate. Loss from the change in value of Alternative Energy Partnership Investments was$23.1 million for the six months endedJune 30, 2021 . Loss from the change in value of Alternative Energy Partnership Investments was$7.7 million for the three months endedJune 30, 2021 . Other Income was$8.5 million for the six months endedJune 30, 2021 , compared to$91.8 million for the same period in 2020. Other Income for the six months endedJune 30, 2020 included a gain of$89.4 million related to the satisfaction of the CSC Judgment. Other Income was$7.0 million for the three months endedJune 30, 2021 , compared to$1.5 million for the same period in 2020. Net Realized Gains on Sales of Investments were$33.0 million for the six months endedJune 30, 2021 , compared to$28.2 million for the same period in 2020. Net Realized Gains on Sales of Investments were$19.2 million for the three months endedJune 30, 2021 , compared to$11.7 million for the same period in 2020. 41 -------------------------------------------------------------------------------- Summary of Results (continued) Impairment Losses were$7.2 million for the six months endedJune 30, 2021 , compared to$19.0 million for the same period in 2020. Impairment Losses were$3.2 million for the three months endedJune 30, 2021 , compared to$7.0 million for the same period in 2020. See MD&A, "Investment Results," under the sub-captions "Net Realized Gains on Sales of Investments" and "Impairment Losses" for additional discussion. The Company cannot predict if or when similar investment gains or losses may occur in the future. Non-GAAP Financial Measures 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 (Loss) Adjusted Consolidated Net Operating Income (Loss) 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 or Losses on Sales of Investments; (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 six and three months endedJune 30, 2021 or 2020. 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 42 --------------------------------------------------------------------------------
Non-GAAP Financial Measures (continued)
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 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.
43
--------------------------------------------------------------------------------
Specialty Property & Casualty Insurance
Selected financial information for the Specialty Property & Casualty Insurance
segment follows
Six Months Ended Three Months Ended
Jun 30, Jun 30, Jun 30, Jun 30,
(Dollars in Millions) 2021 2020 2021 2020
Net Premiums Written $ 2,054.0 $ 1,692.1 $ 1,082.0 $ 780.9
Earned Premiums $ 1,887.9 $ 1,581.5 $ 1,010.3 $ 759.0
Net Investment Income 77.7 45.7 42.7 16.9
Change in Value of Alternative Energy Partnership
Investments (11.0) - (3.7) -
Other Income 1.9 1.0 1.0 0.1
Total Revenues 1,956.5 1,628.2 1,050.3 776.0
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE 1,527.4 1,135.6 877.4 515.8
Catastrophe Losses and LAE 9.8 4.7 8.1 4.5
Prior Years:
Non-catastrophe Losses and LAE 79.9 14.9 81.3 9.6
Catastrophe Losses and LAE 0.4 0.2 - -
Total Incurred Losses and LAE 1,617.5 1,155.4 966.8 529.9
Insurance Expenses 375.9 313.3 205.6 161.2
Other Expenses - - - 0.4
Operating Income (Loss) (36.9) 159.5 (122.1) 84.5
Income Tax Benefit (Expense) 25.3 (31.9) 30.4 (17.0)
Segment Net Operating Income (Loss) $
(11.6)
Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 81.0 % 71.9 % 86.9 % 67.9 % Current Year Catastrophe Losses and LAE Ratio 0.5 0.3 0.8 0.6 Prior Years Non-catastrophe Losses and LAE Ratio 4.2 0.9 8.0 1.3 Prior Years Catastrophe Losses and LAE Ratio - - - - Total Incurred Loss and LAE Ratio 85.7 73.1 95.7 69.8 Insurance Expense Ratio 19.9 19.8 20.4 21.2 Combined Ratio 105.6 % 92.9 % 116.1 % 91.0 % Underlying Combined Ratio Current Year Non-catastrophe Losses and LAE Ratio 81.0 % 71.9 % 86.9 % 67.9 % Insurance Expense Ratio 19.9 19.8 20.4 21.2 Underlying Combined Ratio 100.9 % 91.7 % 107.3 % 89.1 % Non-GAAP Measure Reconciliation Combined Ratio 105.6 % 92.9 % 116.1 % 91.0 %
Less:
Current Year Catastrophe Losses and LAE Ratio 0.5 0.3 0.8 0.6
Prior Years Non-catastrophe Losses and LAE Ratio 4.2 0.9 8.0 1.3
Prior Years Catastrophe Losses and LAE Ratio - - - -
Underlying Combined Ratio 100.9 % 91.7 % 107.3 % 89.1 %
44--------------------------------------------------------------------------------Specialty Property & Casualty Insurance (continued) Insurance Reserves Jun 30, Dec 31, (Dollars in Millions) 2021 2020 Insurance Reserves: Non-Standard Automobile$ 1,703.1 $ 1,308.3 Commercial Automobile 281.6 236.5 Insurance Reserves$ 1,984.7 $ 1,544.8 Insurance Reserves: Loss and Allocated LAE Reserves: Case and Allocated LAE$ 1,005.8 $ 744.6 Incurred But Not Reported 810.2 653.6 Total Loss and LAE Reserves 1,816.0 1,398.2 Unallocated LAE Reserves 168.7 146.6 Insurance Reserves$ 1,984.7 $ 1,544.8 See MD&A, "Critical Accounting Estimates," of the 2020 Annual Report 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 Six Months EndedJune 30, 2021 Compared to the Same Period in 2020The Specialty Property & Casualty Insurance segment reported Segment Net Operating Loss of$11.6 million for the six months endedJune 30, 2021 , compared to Segment Net Operating Income of$127.6 million for the same period in 2020. Segment Net Operating Income decreased by$139.2 million due primarily to an increase in underlying losses and LAE as a percentage of earned premiums and adverse loss reserve development, partially offset by earnings from the acquisition of AAC, lower expenses as a percentage of earned premiums, and higher net investment income. Underlying losses and LAE exclude the impact of catastrophes and loss and LAE reserve development. Earned Premiums in theSpecialty Property & Casualty Insurance segment increased by$306.4 million for the six months endedJune 30, 2021 , compared to the same period in 2020, driven by the acquisition of AAC, premium credits in the prior period, and higher volume. Volumes were higher in both the Private Passenger Auto and Commercial Automobile product lines. Net Investment Income in theSpecialty Property & Casualty Insurance segment increased by$32.0 million for the six months endedJune 30, 2021 , compared to the same period in 2020, due primarily to a higher return on Alternative Investments and a higher level of investments, partially offset by lower yields on fixed income securities. Loss related to Changes in Value of Alternative Energy Partnership Investments was$11.0 million for the six months endedJune 30, 2021 . Tax benefits related to the Alternative Energy Partnership Investments were$17.8 million , resulting in net income attributable to Alternative Energy Partnership Investments of$6.8 million for the six months endedJune 30, 2021 . Underlying losses and LAE as a percentage of earned premiums were 81.0% in 2021, a deterioration of 9.1 percentage points, compared to 2020, due primarily to higher claim frequency and severity trends. Underlying losses and LAE exclude the impact of catastrophes and loss and LAE reserve development. Adverse loss and LAE reserve development (including catastrophe reserve development) was$80.3 million in 2021, compared to adverse development of$15.1 million in 2020. Adverse loss and LAE reserve development in 2021 was largely driven by legal developments and increased severity in personal injury protection coverage inFlorida and liability coverages. Catastrophe losses and LAE (excluding reserve development) were$9.8 million in 2021, compared to$4.7 million in 2020, a deterioration of$5.1 million . 45 --------------------------------------------------------------------------------Specialty Property & Casualty Insurance (continued) Insurance Expenses were$375.9 million , or 19.9% of earned premiums, in 2021, an deterioration of 0.1 percentage point compared to 2020, driven primarily by amortization of intangibles for AAC acquisition in 2021 partially offset by lower earned premium in 2020 due primarily to premium credits.The Specialty Property & Casualty Insurance segment's effective income tax rate differs from the federal statutory income tax rate due primarily to investment tax credits, tax-exempt investment income and dividends received deductions. Three Months EndedJune 30, 2021 Compared to the Same Period in 2020The Specialty Property & Casualty Insurance segment reported a Segment Net Operating Loss of$91.7 million for the three months endedJune 30, 2021 , compared to Segment Net Operating Income of$67.5 million for the same period in 2020. Segment Net Operating Income decreased by$159.2 million due primarily to an increase in underlying losses and LAE as a percentage of earned premiums and adverse loss reserve development, partially offset by earnings from the acquisition of AAC, lower expenses as a percentage of earned premiums, and higher net investment income. Underlying losses and LAE exclude the impact of catastrophes and loss and LAE reserve development. Earned Premiums in theSpecialty Property & Casualty Insurance segment increased by$251.3 million for the three months endedJune 30, 2021 , compared to the same period in 2020, driven by the acquisition of AAC, premium credits in the prior period, and higher volume. Volumes were higher in both the Private Passenger Auto and Commercial Automobile product lines. Net Investment Income in theSpecialty Property & Casualty Insurance segment increased by$25.8 million for the three months endedJune 30, 2021 , compared to the same period in 2020, due primarily to a higher return on Alternative Investments and a higher level of investments, partially offset by lower yields on fixed income securities. Loss related to Change in Value of Alternative Energy Partnership Investments was$3.7 million for the three months endedJune 30, 2021 . Tax benefits related to the Alternative Energy Partnership Investments were$4.0 million , resulting in net income attributable to Alternative Energy Partnership Investments of$0.3 million for the three months endedJune 30, 2021 . Underlying losses and LAE as a percentage of earned premiums were 86.9% in 2021, a deterioration of 19.0 percentage points, compared to 2020, due primarily to higher claim frequency and severity trends. Underlying losses and LAE exclude the impact of catastrophes and loss and LAE reserve development. Adverse loss and LAE reserve development (including catastrophe reserve development) was$81.3 million in 2021, compared to adverse development of$9.6 million in 2020. Adverse loss and LAE reserve development in 2021 was largely driven by legal developments and increased severity in personal injury protection coverage inFlorida and liability coverages. Catastrophe losses and LAE (excluding reserve development) were$8.1 million in 2021, compared to$4.5 million in 2020, a deterioration of$3.6 million . Insurance Expenses were$205.6 million , or 20.4% of earned premiums, in 2021, an improvement of 0.8 percentage points compared to 2020, driven primarily by higher earned premiums in the period.The Specialty Property & Casualty Insurance segment's effective income tax rate differs from the federal statutory income tax rate due primarily to investment tax credits, tax-exempt investment income and dividends received deductions. 46 --------------------------------------------------------------------------------Specialty Property & Casualty Insurance (continued)Specialty Personal Automobile Insurance Selected financial information for the specialty personal automobile insurance product line follows. Six Months Ended Three Months Ended Jun 30, Jun 30, Jun 30, Jun 30, (Dollars in Millions) 2021 2020 2021 2020 Net Premiums Written$ 1,825.8 $ 1,530.8 $ 964.3 $ 700.5 Earned Premiums$ 1,695.0 $ 1,443.0 $ 909.6 $ 689.8 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE$ 1,391.5
9.0 4.4 7.4 4.2
Prior Years :
Non-catastrophe Losses and LAE 71.6 29.0 76.0 11.2
Catastrophe Losses and LAE 0.4 0.3 - 0.1
Total Incurred Losses and LAE $ 1,472.5 Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 82.2 % 72.7 % 88.5 % 68.5 % Current Year Catastrophe Losses and LAE Ratio 0.5 0.3 0.8 0.6 Prior Years Non-catastrophe Losses and LAE Ratio 4.2 2.0 8.4 1.6 Prior Years Catastrophe Losses and LAE Ratio - - - - Total Incurred Loss and LAE Ratio 86.9 % 75.0 % 97.7 % 70.7 % Six Months EndedJune 30, 2021 Compared to the Same Period in 2020 Earned Premiums from specialty personal automobile insurance increased by$252.0 million for the six months endedJune 30, 2021 , compared to the same period in 2020, due primarily to the acquisition of AAC, premium credits in the prior period, and higher volume. Incurred losses and LAE were$1,472.5 million , or 86.9% of earned premiums in 2021, compared to$1,082.1 million , or 75.0% of earned premiums, in 2020. Incurred losses and LAE as a percentage of earned premiums increased due primarily to higher claim frequency and severity trends, and higher adverse loss reserve development. Underlying losses and LAE as a percentage of related earned premiums were 82.2% in 2021, compared to 72.7% in 2020, an increase of 9.5%. Adverse loss and LAE reserve development was$72.0 million in 2021, compared to adverse development of$29.3 million in 2020, primarily driven by legal developments and increased severity in personal injury protection coverage inFlorida and liability coverages. Catastrophe losses and LAE (excluding reserve development) were$9.0 million in 2021, compared to$4.4 million in 2020. Three Months EndedJune 30, 2021 Compared to the Same Period in 2020 Earned Premiums from specialty personal automobile insurance increased by$219.8 million for the three months endedJune 30, 2021 , compared to the same period in 2020, due primarily to the acquisition of AAC, premium credits in the prior period, and higher volume. Incurred losses and LAE were$888.5 million , or 97.7% of earned premiums in 2021, compared to$487.9 million , or 70.7% of earned premiums, in 2020. Incurred losses and LAE as a percentage of earned premiums increased due primarily to higher claim frequency and severity trends and higher adverse loss reserve development. Underlying losses and LAE as a percentage of related earned premiums were 88.5% in 2021, compared to 68.5% in 2020, an increase of 20.0% points. Adverse loss and LAE reserve development was$76.0 million in 2021, primarily driven by legal developments and increased severity in personal injury protection coverage inFlorida and liability coverages, compared to adverse development of$11.3 million in 2020. Catastrophe losses and LAE (excluding reserve development) were$7.4 million in 2021, compared to$4.2 million in 2020. 47
--------------------------------------------------------------------------------Specialty Property & Casualty Insurance (continued)Commercial Automobile Insurance Selected financial information for the commercial automobile insurance product line follows. Six Months Ended Three Months Ended Jun 30, Jun 30, Jun 30, Jun 30, (Dollars in Millions) 2021 2020 2021 2020 Net Premiums Written$ 228.2 $ 161.3 $ 117.7 $ 80.4 Earned Premiums$ 192.9 $ 138.5 $ 100.7 $ 69.2 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE$ 135.9
0.8 0.3 0.7 0.3
Prior Years :
Non-catastrophe Losses and LAE 8.3 (14.1) 5.3 (1.6)
Catastrophe Losses and LAE - (0.1) - (0.1)
Total Incurred Losses and LAE $ 145.0 Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 70.5 % 63.0 % 71.8 % 62.7 % Current Year Catastrophe Losses and LAE Ratio 0.4 0.2 0.7 0.4 Prior Years Non-catastrophe Losses and LAE Ratio 4.3 (10.2) 5.3 (2.3) Prior Years Catastrophe Losses and LAE Ratio - (0.1) - (0.1) Total Incurred Loss and LAE Ratio 75.2 % 52.9 % 77.8 % 60.7 % Six Months EndedJune 30, 2021 Compared to the Same Period in 2020 Earned Premiums from commercial automobile insurance increased by$54.4 million for the six months endedJune 30, 2021 , compared to the same period in 2020, due primarily to higher volume. Incurred losses and LAE were$145.0 million , or 75.2% of earned premiums in 2021, compared to$73.3 million , or 52.9% of earned premiums in 2020. Incurred losses and LAE as a percentage of earned premiums increased due primarily to a deterioration in underlying losses and LAE as a percentage of earned premiums as well as adverse loss and LAE reserve development. Underlying losses and LAE as a percentage of earned premiums were 70.5% in 2021, compared to 63.0% in 2020, a deterioration of 7.5 percentage points due primarily to higher claim severity trends. Adverse loss and LAE reserve development was$8.3 million in 2021, compared to favorable reserve development of$14.2 million in 2020. Three Months EndedJune 30, 2021 Compared to the Same Period in 2020 Earned Premiums from commercial automobile insurance increased by$31.5 million for the three months endedJune 30, 2021 , compared to the same period in 2020, due primarily to higher volume. Incurred losses and LAE were$78.3 million , or 77.8% of earned premiums in 2021, compared to$42.0 million , or 60.7% of earned premiums in 2020. Incurred losses and LAE as a percentage of earned premiums increased due primarily to a deterioration in underlying losses and LAE as a percentage of earned premiums as well as adverse loss and LAE reserve development. Underlying losses and LAE as a percentage of earned premiums were 71.8% in 2021, compared to 62.7% in 2020, a deterioration of 9.1 percentage points due primarily to higher claim severity trends. Adverse loss and LAE reserve development was$5.3 million in 2021, compared to favorable reserve development of$1.7 million in 2020. 48 --------------------------------------------------------------------------------Preferred Property & Casualty Insurance Selected financial information for thePreferred Property & Casualty Insurance segment follows. Six Months Ended Three Months Ended Jun 30, Jun 30, Jun 30, Jun 30, (Dollars in Millions) 2021 2020 2021 2020 Net Premiums Written$ 324.0 $ 325.6 $ 169.6 $ 161.5 Earned Premiums$ 325.4 $ 344.5 $ 163.2 $ 163.6 Net Investment Income 35.4 14.0 19.5 4.3 Changes in Value ofAlternative Energy Partnership Investments (6.1) - (2.0) - Other Income - 0.1 - 0.1 Total Revenues 354.7 358.6 180.7 168.0 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE 212.4 191.0 116.2 82.5 Catastrophe Losses and LAE 48.2 25.4 24.2 20.6 Prior Years: Non-catastrophe Losses and LAE 5.1 4.9 5.0 8.2 Catastrophe Losses and LAE (3.7) (0.7) (3.4) 0.4 Total Incurred Losses and LAE 262.0 220.6 142.0 111.7 Insurance Expenses 103.1 114.2 52.1 55.5 Operating Income (Loss) (10.4) 23.8 (13.4) 0.8 Income Tax Benefit (Expense) 11.7 (4.5) 5.1 0.1 Segment Net Operating Income (Loss)$ 1.3
Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 65.2 % 55.4 % 71.2 % 50.5 % Current Year Catastrophe Losses and LAE Ratio 14.8 7.4 14.8 12.6 Prior Years Non-catastrophe Losses and LAE Ratio 1.6 1.4 3.1 5.0 Prior Years Catastrophe Losses and LAE Ratio (1.1) (0.2) (2.1) 0.2 Total Incurred Loss and LAE Ratio 80.5 64.0 87.0 68.3 Insurance Expense Ratio 31.7 33.1 31.9 33.9 Combined Ratio 112.2 % 97.1 % 118.9 % 102.2 % Underlying Combined Ratio Current Year Non-catastrophe Losses and LAE Ratio 65.2 % 55.4 % 71.2 % 50.5 % Insurance Expense Ratio 31.7 33.1 31.9 33.9 Underlying Combined Ratio 96.9 % 88.5 % 103.1 % 84.4 % Non-GAAP Measure Reconciliation Combined Ratio 112.2 % 97.1 % 118.9 % 102.2 %
Less:
Current Year Catastrophe Losses and LAE Ratio 14.8 7.4 14.8 12.6
Prior Years Non-catastrophe Losses and LAE Ratio 1.6 1.4 3.1 5.0
Prior Years Catastrophe Losses and LAE Ratio (1.1) (0.2) (2.1) 0.2
Underlying Combined Ratio 96.9 % 88.5 % 103.1 % 84.4 %
49--------------------------------------------------------------------------------
Catastrophe Frequency and Severity
Six Months Ended
Jun 30, 2021 Jun 30, 2020
Number of Losses and Number of Losses and
(Dollars in Millions) Events LAE Events LAE
Range of Losses and LAE Per Event:
Below $5 26 $ 22.3 27 $ 25.4
$5 - $10 2 10.8 - -
$10 - $15 - - - -
$15 - $20 1 15.1 - -
$20 - $25 - - - -
Greater Than $25 - - - -
Total 29 $ 48.2 27 $ 25.4
Insurance Reserves
Jun 30, Dec 31,
(Dollars in Millions) 2021 2020
Insurance Reserves:
Preferred Automobile $ 282.9 $ 281.3
Homeowners 110.7 104.0
Other 31.0 26.3
Insurance Reserves $ 424.6 $ 411.6
Insurance Reserves:
Loss and Allocated LAE Reserves:
Case and Allocated LAE $ 282.3 $ 262.2
Incurred But Not Reported 116.1 122.0
Total Loss and LAE Reserves 398.4 384.2
Unallocated LAE Reserves 26.2 27.4
Insurance Reserves $ 424.6 $ 411.6
See MD&A, "Critical Accounting Estimates," of the 2020 Annual Report 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
Six Months Ended June 30, 2021 Compared to the Same Period in 2020
The Preferred Property & Casualty Insurance segment reported Segment Net
Operating Income of $1.3 million for the six months ended June 30, 2021 ,
compared to Segment Net Operating Income of $19.3 million for the same period in
2020. Segment Net Operating Income decreased by $18.0 million due primarily to
higher catastrophe losses and LAE (excluding loss reserve development) and the
adverse impact of underlying losses and LAE as a percentage of earned premiums,
partially offset by an improvement in net investment income.
Earned Premiums in the Preferred Property & Casualty Insurance segment decreased
by $19.1 million for the six months ended June 30, 2021 , compared to the same
period in 2020, due primarily to lower homeowners insurance volume.
50
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Preferred Property & Casualty Insurance (continued)
Net Investment Income in the Preferred Property & Casualty Insurance segment
increased by $21.4 million for the six months ended June 30, 2021 , compared to
the same period in 2020, due primarily to a higher return on Alternative
Investments and a higher level of investments, partially offset by lower yields
on fixed income securities.
Loss related to Changes in Value of Alternative Energy Partnership Investments
was $6.1 million for the six months ended June 30, 2021 . Tax benefits related to
the Alternative Energy Partnership Investments were $9.9 million , resulting in
net income attributable to Alternative Energy Partnership Investments of $3.8
million for the six months ended June 30, 2021 .
Underlying losses and LAE as a percentage of earned premiums were 65.2% in 2021,
a deterioration of 9.8 percentage points, compared to 2020. Catastrophe losses
and LAE (excluding reserve development) were $48.2 million in 2021, compared to
$25.4 million in 2020, an increase of $22.8 million . Catastrophe losses and LAE
(excluding reserve development) increased due primarily to an increase in
severity of catastrophic events in 2021 compared to 2020. There were three
catastrophic events above $5 million in 2021, compared to no catastrophic events
above $5 million in 2020. Adverse loss and LAE reserve development (including
catastrophe reserve development) was $1.4 million in 2021, compared to $4.2
million in 2020.
Insurance expenses were $103.1 million , or 31.7% of earned premiums in 2021, an
improvement of 1.4% percentage points compared to 2020.
The Preferred Property & Casualty Insurance segment's effective income tax rate
differs from the federal statutory income tax rate due primarily to investment
tax credits, tax-exempt investment income and dividends received deductions.
Three Months Ended June 30, 2021 Compared to the Same Period in 2020
The Preferred Property & Casualty Insurance segment reported Segment Net
Operating Loss of $8.3 million for the three months ended June 30, 2021 ,
compared to Segment Net Operating Income of $0.9 million for the same period in
2020. Segment Net Operating Income decreased by $9.2 million due primarily to
higher catastrophe losses and LAE (excluding loss reserve development) and
higher underlying losses and LAE as a percentage of earned premiums, partially
offset by an improvement in net investment income.
Earned Premiums in the Preferred Property & Casualty Insurance segment decreased
by $0.4 million for the three months ended June 30, 2021 , compared to the same
period in 2020, due primarily to lower homeowners insurance volume.
Net Investment Income in the Preferred Property & Casualty Insurance segment
increased by $15.2 million for the three months ended June 30, 2021 , compared to
the same period in 2020, due primarily to higher return on Alternative
Investments, partially offset by lower yields on fixed income securities.
Loss related to Changes in Value of Alternative Energy Partnership Investments
was $2.0 million for the three months ended June 30, 2021 . Tax benefits related
to the Alternative Energy Partnership Investments were $2.3 million , resulting
in net income attributable to Alternative Energy Partnership Investments of $0.3
million for the three months ended June 30, 2021 .
Underlying losses and LAE as a percentage of earned premiums were 71.2% in 2021,
a deterioration of 20.7 percentage points, compared to 2020. Catastrophe losses
and LAE (excluding reserve development) were $24.2 million in 2021, compared to
$20.6 million in 2020, a deterioration of $3.6 million . Catastrophe losses and
LAE (excluding reserve development) increased due primarily to an increase in
severity of catastrophic events in 2021, compared to 2020. There were two
catastrophic events above $5 million in 2021, compared to no catastrophic events
above $5 million in 2020. Adverse loss and LAE reserve development (including
catastrophe reserve development) was $1.6 million in 2021, compared to $8.6
million in 2020.
Insurance expenses were $52.1 million , or 31.9% of earned premiums in 2021, an
improvement of 2.0% percentage points compared to 2020.
The Preferred Property & Casualty Insurance segment's effective income tax rate
differs from the federal statutory income tax rate due primarily to investment
tax credits, tax-exempt investment income and dividends received deductions.
51
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Preferred Personal Automobile Insurance
Selected financial information for the preferred personal automobile insurance
product line follows.
Six Months Ended Three Months Ended
Jun 30, Jun 30, Jun 30, Jun 30,
(Dollars in Millions) 2021 2020 2021 2020
Net Premiums Written $ 204.8 $ 201.5 $ 104.4 $ 95.6
Earned Premiums $ 206.5 $ 214.0 $ 103.5 $ 99.1
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE $ 149.4
3.4 2.2 2.8 2.0
Prior Years :
Non-catastrophe Losses and LAE 4.8 11.9 3.6 9.7
Catastrophe Losses and LAE (0.1) (0.4) (0.2) (0.3)
Total Incurred Losses and LAE $ 157.5 Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 72.4 % 60.6 % 78.8 % 54.3 % Current Year Catastrophe Losses and LAE Ratio 1.6 1.0 2.7 2.0 Prior Years Non-catastrophe Losses and LAE Ratio 2.3 5.6 3.5 9.8 Prior Years Catastrophe Losses and LAE Ratio - (0.2) (0.2) (0.3) Total Incurred Loss and LAE Ratio 76.3 % 67.0 % 84.8 % 65.8 % Six Months EndedJune 30, 2021 Compared to the Same Period in 2020 Earned Premiums on preferred automobile insurance decreased by$7.5 million for the six months endedJune 30, 2021 , compared to the same period in 2020, due primarily to lower volume. Incurred losses and LAE were$157.5 million , or 76.3% of earned premiums, in 2021, compared to$143.4 million , or 67.0% of earned premiums, in 2020. 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 lower levels of adverse change in loss and LAE reserve development. Underlying losses and LAE as a percentage of earned premiums were 72.4% in 2021, compared to 60.6% in 2020, a deterioration of 11.8 percentage points primarily due to higher claim frequency and severity trends. Adverse loss and LAE reserve development (including catastrophe loss reserve development) was$4.7 million in 2021, compared to$11.5 million in 2020. Catastrophe losses and LAE (excluding reserve development) were$3.4 million in 2021, compared to$2.2 million in 2020. Three Months EndedJune 30, 2021 Compared to the Same Period in 2020 Earned Premiums on preferred automobile insurance increased by$4.4 million for the three months endedJune 30, 2021 , compared to the same period in 2020, due primarily to higher volume. Incurred losses and LAE were$87.8 million , or 84.8% of earned premiums, in 2021, compared to$65.2 million , or 65.8% of earned premiums, in 2020. 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 lower levels of adverse change in loss and LAE reserve development. Underlying losses and LAE as a percentage of earned premiums were 78.8% in 2021, compared to 54.3% in 2020, a deterioration of 24.5 percentage points primarily due to higher claim frequency and severity trends. Adverse loss and LAE reserve development (including catastrophe loss reserve development) was$3.4 million in 2021, compared to$9.4 million in 2020. Catastrophe losses and LAE (excluding reserve development) were$2.8 million in 2021, compared to$2.0 million in 2020. 52 --------------------------------------------------------------------------------Preferred Property & Casualty Insurance (continued)Homeowners Insurance Selected financial information for the homeowners insurance product line follows. Six Months Ended Three Months Ended Jun 30, Jun 30, Jun 30, Jun 30, (Dollars in Millions) 2021 2020 2021 2020 Net Premiums Written$ 102.4 $ 107.1 $ 56.3 $ 57.2 Earned Premiums$ 102.1 $ 112.4 $ 51.3 55.6 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE$ 54.7 $ 54.1 $ 30.5 $ 25.4 Catastrophe Losses and LAE 43.8 22.7 21.8 18.2 Prior Years: Non-catastrophe Losses and LAE (2.3) (5.1) 0.2 (0.8) Catastrophe Losses and LAE (1.9) (0.1) (1.8) 0.6 Total Incurred Losses and LAE$ 94.3 $ 71.6 $ 50.7 $ 43.4 Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 53.7 % 48.1 % 59.4 % 45.7 % Current Year Catastrophe Losses and LAE Ratio 42.9 20.2 42.5 32.7 Prior Years Non-catastrophe Losses and LAE Ratio (2.3) (4.5) 0.4 (1.4) Prior Years Catastrophe Losses and LAE Ratio (1.9) (0.1) (3.5) 1.1 Total Incurred Loss and LAE Ratio 92.4 % 63.7 % 98.8 % 78.1 % Six Months EndedJune 30, 2021 Compared to the Same Period in 2020 Earned Premiums in homeowners insurance decreased by$10.3 million for the six months endedJune 30, 2021 , compared to the same period in 2020, due primarily to lower volume. Incurred losses and LAE were$94.3 million , or 92.4% of earned premiums, in 2021, compared to$71.6 million , or 63.7% of earned premiums, in 2020. Incurred losses and LAE as a percentage of earned premiums increased due primarily to higher incurred catastrophe losses (excluding loss reserve development) and higher underlying losses and LAE as a percentage of earned premiums. Underlying losses and LAE as a percentage of earned premiums were 53.7% in 2021, compared to 48.1% in 2020, an deterioration of 5.6 percentage points. Catastrophe losses and LAE (excluding reserve development) were$43.8 million in 2021, compared to$22.7 million in 2020. There were three catastrophic events above$5 million in 2021, compared to no catastrophic events above$5 million in 2020. Favorable loss and LAE reserve development (including catastrophe loss reserve development) was$4.2 million in 2021, compared to$5.2 million in 2020. Three Months EndedJune 30, 2021 Compared to the Same Period in 2020 Earned Premiums in homeowners insurance decreased by$4.3 million for the three months endedJune 30, 2021 , compared to the same period in 2020, due primarily to lower volume. Incurred losses and LAE were$50.7 million , or 98.8% of earned premiums, in 2021, compared to$43.4 million , or 78.1% of earned premiums, in 2020. Incurred losses and LAE as a percentage of earned premiums increased due primarily to higher incurred catastrophe losses (excluding loss reserve development) and higher underlying losses and LAE as a percentage of earned premiums. Underlying losses and LAE as a percentage of earned premiums were 59.4% in 2021, compared to 45.7% in 2020, an increase of 13.7 percentage points. Catastrophe losses and LAE (excluding reserve development) were$21.8 million in 2021, compared to$18.2 million in 2020. There were two catastrophic events above$5 million in 2021, compared to no catastrophic events above$5 million in 2020. Favorable loss and LAE reserve development (including catastrophe loss reserve development) was$1.6 million in 2021, compared to$0.2 million in 2020. 53 --------------------------------------------------------------------------------
Six Months Ended Three Months Ended
Jun 30, Jun 30, Jun 30, Jun 30,
(Dollars in Millions) 2021 2020 2021 2020
Net Premiums Written $ 16.8 $ 17.0 $ 8.9 $ 8.7
Earned Premiums $ 16.8 $ 18.1 $ 8.4 $ 8.9
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE $ 8.3 $ 7.2 $ 4.1 $ 3.3
Catastrophe Losses and LAE 1.0 0.5 (0.4) 0.4
Prior Years:
Non-catastrophe Losses and LAE 2.6 (1.9) 1.2 (0.7)
Catastrophe Losses and LAE (1.7) (0.2) (1.4) 0.1
Total Incurred Losses and LAE $ 10.2 $ 5.6 $ 3.5 $ 3.1
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio 49.3 % 39.7 % 48.9 % 37.1 %
Current Year Catastrophe Losses and LAE Ratio 6.0 2.8 (4.8) 4.5
Prior Years Non-catastrophe Losses and LAE Ratio 15.5 (10.5) 14.3 (7.9)
Prior Years Catastrophe Losses and LAE Ratio (10.1) (1.1) (16.7) 1.1
Total Incurred Loss and LAE Ratio 60.7 % 30.9 % 41.7 % 34.8 %
Six Months Ended June 30, 2021 Compared to the Same Period in 2020
Earned Premiums on other personal insurance decreased by $1.3 million for the
six months ended June 30, 2021 , compared to the same period in 2020. Incurred
losses and LAE were $10.2 million , or 60.7% of earned premiums, in 2021,
compared to $5.6 million , or 30.9% of earned premiums, in 2020. Underlying
losses and LAE as a percentage of earned premiums were 49.3% in 2021, compared
to 39.7% in 2020, a deterioration of 9.6 percentage points. Catastrophe losses
and LAE (excluding loss reserve development) were $1.0 million in 2021, compared
to $0.5 million in 2020. Adverse loss and LAE reserve development (including
catastrophe losses development) was $0.9 million in 2021, compared to favorable
development of $2.1 million in 2020.
Three Months Ended June 30, 2021 Compared to the Same Period in 2020
Earned Premiums on other personal insurance decreased by $0.5 million for the
three months ended June 30, 2021 , compared to the same period in 2020. Incurred
losses and LAE were $3.5 million , or 41.7% of earned premiums, in 2021, compared
to $3.1 million , or 34.8% of earned premiums, in 2020. Underlying losses and LAE
as a percentage of earned premiums were 48.9% in 2021, compared to 37.1% in
2020, a deterioration of 11.8 percentage points. Catastrophe losses and LAE
(excluding loss reserve development) were $0.4 million favorable in 2021,
compared to $0.4 million adverse in 2020. Favorable loss and LAE reserve
development (including catastrophe losses development) was $0.2 million in 2021,
compared to $0.6 million in 2020.
54
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Life & Health Insurance
Selected financial information for the Life & Health Insurance segment follows.
Six Months Ended Three Months Ended
Jun 30, Jun 30, Jun 30, Jun 30,
(Dollars in Millions) 2021 2020 2021 2020
Earned Premiums $ 325.2 $ 325.7 $ 164.2 $ 162.7
Net Investment Income 103.5 95.3 52.4 44.3
Changes in Value of Alternative Energy Partnership
Investments (6.0) - (2.0) -
Other Income 0.2 0.6 0.1 0.5
Total Revenues 422.9 421.6 214.7 207.5
Policyholders' Benefits and Incurred Losses and LAE 234.0 206.6 115.3 105.9
Insurance Expenses 176.5 168.6 86.2 81.7
Operating Income (Loss) 12.4 46.4 13.2 19.9
Income Tax Benefit (Expense) 7.9 (8.0) (0.2) (3.8)
Segment Net Operating Income (Loss) $ 20.3 $ 38.4 $ 13.0 $ 16.1
Insurance Reserves
Jun 30, Dec 31,
(Dollars in Millions) 2021 2020
Insurance Reserves:
Future Policyholder Benefits $ 3,466.4 $ 3,440.5
Incurred Losses and LAE Reserves:
Life 58.8 61.1
Accident and Health 26.4 25.9
Property 4.4 4.6
Total Incurred Losses and LAE Reserves 89.6 91.6
Insurance Reserves $ 3,556.0 $ 3,532.1
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 Death Master File maintained by the Social
Security Administration and other death verification databases to identify
potential situations where the beneficiaries may not have filed a claim
following the death of an insured and initiate an outreach process to identify
and contact beneficiaries and settle claims. Policyholders' Benefits and
Incurred Losses and Loss Adjustment Expenses for the year ended December 31,
2016 included a pre-tax charge of $77.8 million to recognize the initial impact
of using death verification databases in the Company's operations, including to
determine its IBNR liability for unpaid claims and claims adjustment expenses
for life insurance products. Subsequently, the Company reduced its estimate of
the initial impact of using death verification databases by $30.3 million , of
which $4.5 million and $4.8 million were recognized during the first and second
quarters of 2020.
Overall
Six Months EndedJune 30, 2021 Compared to the Same Period in 2020 Earned Premiums in theLife & Health Insurance segment decreased by$0.5 million for the six months endedJune 30, 2021 , compared to the same period in 2020, due primarily to lower volume on accident and health insurance products and property insurance products and a reduction in the estimated return premium reserve for insurance products subject to minimum loss ratio ("MLR") in 2020, partially offset by higher volume on life insurance products. Net Investment Income increased by$8.2 million in 2021, compared to 2020, due primarily to a higher return on Alternative Investments and a higher level of investments, partially offset by lower yields on fixed income securities. 55 --------------------------------------------------------------------------------Life & Health Insurance (continued) Loss related to Changes in Value of Alternative Energy Partnership Investments was$6.0 million for the six months endedJune 30, 2021 . Tax benefits related to the Alternative Energy Partnership Investments were$9.6 million , resulting in net income attributable to Alternative Energy Partnership Investments of$3.6 million for the six months endedJune 30, 2021 . Policyholders' Benefits and Incurred Losses and LAE increased by$27.4 million in 2021, compared to 2020, due primarily to higher mortality for life insurance related to COVID-19, the impact of reducing the Company's estimate of the ultimate cost of using death verification databases in the Company's operations in 2020, and higher frequency and severity of accident and health insurance claims.
Insurance Expenses in the
Segment Net Operating Income in theLife & Health Insurance segment was$20.3 million for the six months endedJune 30, 2021 , compared to$38.4 million in 2020.The Life & Health Insurance segment's effective income tax rate differs from the federal statutory income tax rate due primarily to investment tax credits, tax-exempt investment income and dividends received deductions. Three Months EndedJune 30, 2021 Compared to the Same Period in 2020 Earned Premiums in theLife & Health Insurance segment increased by$1.5 million for the three months endedJune 30, 2021 , compared to the same period in 2020, due primarily to higher volume on life insurance products, partially offset by lower volume on accident and health insurance products and property insurance products and a reduction in the estimated return premium reserve for insurance products subject to MLR in 2020. Net Investment Income increased by$8.1 million in 2021, compared to 2020, due primarily to a higher return on Alternative Investments and a higher level of investments, partially offset by lower yields on fixed income securities. Loss related to Changes in Value of Alternative Energy Partnership Investments was$2.0 million for the three months endedJune 30, 2021 . Tax benefits related to the Alternative Energy Partnership Investments were$2.2 million , resulting in net income attributable to Alternative Energy Partnership Investments of$0.2 million for the three months endedJune 30, 2021 . Policyholders' Benefits and Incurred Losses and LAE increased by$9.4 million in 2021, compared to 2020, due primarily to the impact of reducing the Company's estimate of the ultimate cost of using death verification databases in the Company's operations in 2020 and higher frequency and severity of claims in accident and health insurance.
Insurance Expenses in the
Segment Net Operating Income in theLife & Health Insurance segment was$13.0 million for the three months endedJune 30, 2021 , compared to$16.1 million in 2020.The Life & Health Insurance segment's effective income tax rate differs from the federal statutory income tax rate due primarily to investment tax credits, tax-exempt investment income and dividends received deductions. 56 --------------------------------------------------------------------------------Life & Health Insurance (continued) Life Insurance Selected financial information for the life insurance product line follows. Six Months Ended Three Months Ended Jun 30, Jun 30, Jun 30, Jun 30, (Dollars in Millions) 2021 2020 2021 2020 Earned Premiums$ 198.7 $ 192.9 $ 100.6 $ 95.7 Net Investment Income 100.5 93.5 50.9 44.8 Changes in Value ofAlternative Energy Partnership Investments (5.7) - (1.9) - Other Income - 0.1 - 0.1 Total Revenues 293.5 286.5 149.6 140.6 Policyholders' Benefits and Incurred Losses and LAE 169.8 144.8 81.9 76.7 Insurance Expenses 113.6 111.2 55.6 50.9 Operating Income (Loss) 10.1 30.5 12.1 13.0 Income Tax Benefit (Expense) 7.9 (4.7) (0.1) (2.4) Total Product Line Net Operating Income (Loss)$ 18.0 $ 25.8 $ 12.0 $ 10.6 Six Months EndedJune 30, 2021 Compared to the Same Period in 2020 Earned Premiums from life insurance increased by$5.8 million for the six months endedJune 30, 2021 , compared to the same period in 2020, due primarily to higher persistency and higher volume of new business sales. Policyholders' Benefits and Incurred Losses and LAE on life insurance were$169.8 million in 2021, compared to$144.8 million in 2020, an increase of$25.0 million due primarily to higher mortality related to COVID-19 and the impact of reducing the Company's estimate of the ultimate cost of using death verification databases in the Company's operations in 2020. Insurance Expenses increased by$2.4 million in 2021, compared to 2020, due primarily to investments made to modernize and strengthen the distribution channel and enhance the capabilities of the business. Three Months EndedJune 30, 2021 Compared to the Same Period in 2020 Earned Premiums from life insurance increased by$4.9 million for the three months endedJune 30, 2021 , compared to the same period in 2020, due primarily to higher persistency and higher volume of new business sales. Policyholders' Benefits and Incurred Losses and LAE on life insurance were$81.9 million in 2021, compared to$76.7 million in 2020, an increase of$5.2 million due primarily to the impact of reducing the Company's estimate of the ultimate cost of using death verification databases in the Company's operations in 2020. Insurance Expenses increased by$4.7 million in 2021, compared to 2020, due primarily to investments made to modernize and strengthen the distribution channel and enhance the capabilities of the business. 57
--------------------------------------------------------------------------------Life & Health Insurance (continued)Accident and Health Insurance Selected financial information for the accident and health insurance product line follows. Six Months Ended Three Months Ended Jun 30, Jun 30, Jun 30, Jun 30, (Dollars in Millions) 2021 2020 2021 2020 Earned Premiums$ 95.3 $ 100.2 $ 47.9 $ 50.8 Net Investment Income 1.8 1.6 0.8 (0.4) Changes in Value ofAlternative Energy Partnership Investments (0.1) - - - Other Income 0.2 0.5 0.1 0.4 Total Revenues 97.2 102.3 48.8 50.8 Policyholders' Benefits and Incurred Losses and LAE 51.3 50.1 26.8 22.0 Insurance Expenses 46.6 44.7 22.2 24.6 Operating Income (Loss) (0.7) 7.5 (0.2) 4.2 Income Tax Expense (Benefit) 0.3 (1.6) 0.1 (0.9) Total Product Line Net Operating Income (Loss)$ (0.4) $ 5.9 $ (0.1) $ 3.3 Six Months EndedJune 30, 2021 Compared to the Same Period in 2020 Earned Premiums from accident and health insurance decreased by$4.9 million for the six months endedJune 30, 2021 , compared to the same period in 2020, due primarily to lower volume of new business and higher lapse rates and a reduction in the estimated return premium reserve for insurance products subject to MLR in 2020, partially offset by higher rates. Incurred accident and health insurance losses were$51.3 million , or 53.8% of earned premiums in 2021, compared to$50.1 million , or 50.0% of earned premiums in 2020, an increase of 3.8 percentage points, due primarily to higher frequency and severity of claims. Insurance Expenses increased by$1.9 million in 2021, compared to 2020. Three Months EndedJune 30, 2021 Compared to the Same Period in 2020 Earned Premiums from accident and health insurance decreased by$2.9 million for the three months endedJune 30, 2021 , compared to the same period in 2020, due primarily to lower volume of new business and higher lapse rates and a reduction in the estimated return premium reserve for insurance products subject to MLR in 2020, partially offset by higher rates. Incurred accident and health insurance losses were$26.8 million , or 55.9% of earned premiums in 2021, compared to$22.0 million , or 43.3% of earned premiums in 2020, an increase of 12.6 percentage points, due primarily to higher frequency and severity of claims. Insurance Expenses decreased by$2.4 million in 2021, compared to 2020. 58 --------------------------------------------------------------------------------Life & Health Insurance (continued)Property Insurance Selected financial information for the property insurance product line follows. Six Months Ended Three Months Ended Jun 30, Jun 30, Jun 30, Jun 30, (Dollars in Millions) 2021 2020 2021 2020 Earned Premiums$ 31.2 $ 32.6 $ 15.7 $ 16.2 Net Investment Income (Loss) 1.2 0.2 0.7 (0.1) Changes in Value ofAlternative Energy Partnership Investments (0.2) - (0.1) - Total Revenues 32.2 32.8 16.3 16.1 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE 7.4 7.5 4.2 3.5 Catastrophe Losses and LAE 4.4 4.0 2.5 3.2 Prior Years: Non-catastrophe Losses and LAE 0.8 (0.1) 0.1 0.3 Catastrophe Losses and LAE 0.3 0.3 (0.2) 0.2 Total Incurred Losses and LAE 12.9 11.7 6.6 7.2 Insurance Expenses 16.3 12.7 8.4 6.2 Operating Income (Loss) 3.0 8.4 1.3 2.7 Income Tax Benefit (Expense) (0.3) (1.7) (0.2) (0.5) Total Product Line Net Operating Income (Loss)$ 2.7 $ 6.7 $ 1.1 $ 2.2 Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 23.6 % 23.0 % 26.8 % 21.5 % Current Year Catastrophe Losses and LAE Ratio 14.1 12.3 15.9 19.8 Prior Years Non-catastrophe Losses and LAE Ratio 2.6 (0.3) 0.6 1.9 Prior Years Catastrophe Losses and LAE Ratio 1.0 0.9 (1.3) 1.2 Total Incurred Loss and LAE Ratio 41.3 % 35.9 % 42.0 % 44.4 % Six Months EndedJune 30, 2021 Compared to the Same Period in 2020 Earned Premiums from property insurance decreased by$1.4 million for the six months endedJune 30, 2021 , compared to the same period in 2020, due primarily to a lower volume of new business. Incurred losses and LAE on property insurance were$12.9 million , or 41.3% of earned premiums in 2021, compared to$11.7 million , or 35.9% of earned premiums in 2020. Underlying losses and LAE were$7.4 million , or 23.6% of earned premiums in 2021, compared to$7.5 million , or 23.0% of earned premiums in 2020, an increase of 0.6 percentage points due primarily to higher claim frequency. Catastrophe losses and LAE (excluding loss reserve development) were$4.4 million in 2021, compared to$4.0 million in 2020. Catastrophe losses and LAE increased$0.4 million due primarily to a higher frequency of catastrophe claims. Adverse loss and LAE reserve development was$1.1 million in 2021, compared to adverse development of$0.2 million in 2020. Insurance expenses increased$3.6 million in 2021, compared to 2020. Three Months EndedJune 30, 2021 Compared to the Same Period in 2020 Earned Premiums from property insurance decreased by$0.5 million for the three months endedJune 30, 2021 , compared to the same period in 2020, due primarily to a lower volume of new business. Incurred losses and LAE on property insurance were$6.6 million , or 42.0% of earned premiums in 2021, compared to$7.2 million , or 44.4% of earned premiums in 2020. Underlying losses and LAE were$4.2 million , or 26.8% of earned premiums in 2021, compared to$3.5 million , or 21.5% of earned premiums in 2020, an increase of 5.3 percentage points due primarily to higher claim frequency. Catastrophe losses and LAE (excluding loss reserve development) were$2.5 million in 2021, compared to$3.2 million in 2020. Catastrophe losses and LAE decreased$0.7 million due primarily to a lower frequency of catastrophe claims. 59 --------------------------------------------------------------------------------Life & Health Insurance (continued) Favorable loss and LAE reserve development was$0.1 million in 2021, compared to adverse development of$0.5 million in 2020. Insurance expenses increased$2.2 million in 2021, compared to 2020. Investment Results Net Investment Income Net Investment Income for the six and three months endedJune 30, 2021 and 2020 was: Six Months Ended Three Months Ended Jun 30, Jun 30, Jun 30, Jun 30, (Dollars in Millions) 2021 2020 2021 2020 Investment Income: Interest on Fixed Income Securities$ 138.7 $ 145.3 $ 69.7 $ 74.3
Dividends on Equity Securities Excluding Alternative Investments
6.9 7.9 4.8 3.6
Alternative Investments:
Equity Method Limited Liability Investments 38.9 (10.9) 16.4 (12.7)
Limited Liability Investments Included in Equity
Securities 19.8 4.9 15.3 1.1
Total Alternative Investments 58.7 (6.0) 31.7 (11.6)
Short-term Investments 0.4 1.9 (0.8) 0.3
Loans to Policyholders 10.9 11.1 5.4 5.5
Real Estate 4.8 4.8 2.4 2.3
Other 14.0 6.6 9.3 2.4
Total Investment Income 234.4 171.6 122.5 76.8
Investment Expenses:
Real Estate 4.2 5.3 2.1 2.7
Other Investment Expenses 13.2 12.9 6.5 6.3
Total Investment Expenses 17.4 18.2 8.6 9.0
Net Investment Income $ 217.0 $ 153.4 $ 113.9 $ 67.8
Net Investment Income was $217.0 million and $153.4 million for the six months
ended June 30, 2021 and 2020, respectively. Net Investment Income increased by
$63.6 million in 2021 due primarily to higher valuations of Equity Method
Limited Liability Investments and higher volume of distributions received from
appreciated Limited Liability Investments included in Equity Securities ,
partially offset by lower yields from the Fixed Maturities portfolio reflecting
lower reinvestment yields. Increase in Other Net Investment Income is driven by
income from Company-Owned Life Insurance due to higher average investment
balance and rate.
Net Investment Income was $113.9 million and $67.8 million for the three months
ended June 30, 2021 and 2020, respectively. Net Investment Income increased by
$46.1 million in 2021 due primarily to higher valuations of Equity Method
Limited Liability Investments and higher volume of distributions received from
appreciated Limited Liability Investments included in Equity Securities ,
partially offset by lower yields from the Fixed Maturities portfolio reflecting
lower reinvestment yields. Increase in Other Net Investment Income is driven by
income from Company-Owned Life Insurance due to higher average investment
balance and rate.
Income and distributions on Alternative Investments can fluctuate significantly
between periods as they are influenced by operating performance of the
underlying investments, changes in market or economic conditions or the timing
of asset sales.
60
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Total Comprehensive Investment Gains (Losses)
The components of Total Comprehensive Investment Gains (Losses) for the six and
three months ended June 30, 2021 and 2020 were:
Six Months Ended Three Months Ended
Jun 30, Jun 30, Jun 30, Jun 30,
(Dollars in Millions) 2021 2020 2021 2020
Recognized in Condensed Consolidated Statements of
Income:
Income (Loss) from Change in Fair Value of Equity and
Convertible Securities $ 93.0 $ (46.2) $ 40.8 $ 71.6
Gains on Sales 34.3 30.0 19.4 12.2
Losses on Sales (1.3) (1.8) (0.2) (0.5)
Impairment Losses (7.2) (19.0) (3.2) (7.0)
118.8 (37.0) 56.8 76.3
Recognized in Other Comprehensive Income (Loss) (176.6) 202.5 189.5 407.3
Total Comprehensive Investment Gains (Losses) $ (57.8) $ 165.5 $ 246.3 $ 483.6
Income (Loss) from Change in Fair Value of Equity and Convertible Securities
The components of Income (Loss) from Change in Fair Value of Equity and
Convertible Securities for the six and three months ended June 30, 2021 and 2020
were:
Six Months Ended Three Months Ended
Jun 30, Jun 30, Jun 30, Jun 30,
(Dollars in Millions) 2021 2020 2021 2020
Preferred Stocks $ 1.7 $ (5.4) $ 1.2 $ 2.5
Common Stocks 4.3 (1.5) 3.9 8.8
Other Equity Interests:
Exchange Traded Funds 57.2 (29.4) 31.3 65.6
Limited Liability Companies and Limited Partnerships 27.6 (8.1) 4.4 (8.5)
Total Other Equity Interests 84.8 (37.5) 35.7 57.1
Income (Loss) from Change in Fair Value of Equity
Securities 90.8 (44.4) 40.8 68.4
Income (Loss) from Change in Fair Value of
2.2 (1.8) - 3.2
Income (Loss) from Change in Fair Value of Equity and
Convertible Securities $ 93.0 $ (46.2) $ 40.8 $ 71.6
61-------------------------------------------------------------------------------- Net Realized Gains on Sales of Investments The components of Net Realized Gains on Sales of Investments for the six and three months endedJune 30, 2021 and 2020 were: Six Months Ended Three Months Ended Jun 30, Jun 30, Jun 30, Jun 30, (Dollars in Millions) 2021 2020 2021 2020 Fixed Maturities: Gains on Sales$ 32.4 $ 26.8 $ 19.2 $ 10.9 Losses on Sales (1.3) (1.6) (0.2) (0.5) Equity Securities: Gains on Sales 1.7 1.4 - 0.1 Losses on Sales - (0.2) - - Real Estate: Gains on Sales 0.2 1.8 0.2 1.2 Net Realized Gains on Sales of Investments$ 33.0 $ 28.2 $ 19.2 $ 11.7 Gross Gains on Sales$ 34.3 $ 30.0 $ 19.4 $ 12.2 Gross Losses on Sales (1.3) (1.8) (0.2) (0.5) Net Realized Gains on Sales of Investments$ 33.0 $ 28.2 $ 19.2 $ 11.7 Impairment Losses The Company regularly reviews its investment portfolio to determine whether a decline in the fair value of an investment has occurred from credit or other, non-credit related factors. If the decline in fair value is due to credit factors and the Company does not expect to receive cash flows sufficient to support the entire amortized cost basis, the credit loss is reported in the Condensed Consolidated Statements of Income in the period that the declines are evaluated. The components of Impairment Losses in the Condensed Consolidated Statements of Income for the six and three months endedJune 30, 2021 and 2020 were: Six Months Ended Three Months EndedJun 30, 2021 Jun 30, 2020 Jun 30, 2021 Jun 30, 2020 (Dollars in Millions) Amount Number of Issuers Amount Number of Issuers Amount Number of Issuers Amount Number of Issuers Fixed Maturities$ (3.8) 15$ (17.0) 30$ (0.6) 9$ (7.0) -Equity Securities (3.4) 11 (2.0) 4 (2.6) 10 - - Impairment Losses$ (7.2) $ (19.0) $ (3.2) $ (7.0) Investment Quality and Concentrations The Company's fixed maturity investment portfolio is comprised primarily of high-grade municipal, corporate and agency bonds. AtJune 30, 2021 , 94.8% 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 theNational Association of Insurance Commissioners ("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 fromStandard & Poor's ("S&P"); a rating of Aaa, Aa, A or Baa from Moody's Investors Service ("Moody's"); or a rating ofAAA , AA, A or BBB from Fitch Ratings. 62
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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
Jun 30, 2021 Dec 31, 2020
NAIC
Rating Rating Fair Value Percentage Fair Value Percentage
1 AAA, AA, A $ 5,046.9 64.4 % $ 4,759.9 62.6 %
2 BBB 2,380.5 30.4 2,355.6 31.0
3-4 BB, B 282.8 3.6 353.1 4.6
5-6 CCC or Lower 124.8 1.6 137.3 1.8
Total Investments in Fixed Maturities $ 7,835.0 100.0 % $ 7,605.9 100.0 %
Gross unrealized losses on the Company's investments in below-investment-grade fixed maturities were$8.5 million and$23.7 million atJune 30, 2021 andDecember 31, 2020 , respectively. The following table summarizes the fair value of the Company's investments in governmental fixed maturities atJune 30, 2021 andDecember 31, 2020 : Jun 30, 2021 Dec 31, 2020 Percentage Percentage of Total of Total (Dollars in Millions) Fair Value Investments Fair Value InvestmentsU.S. Government and Government Agencies and Authorities$ 522.3 5.0 %$ 585.3 5.6 %
States and Political Subdivisions:
Revenue Bonds 1,412.6 13.5 1,153.3 11.1 States 268.3 2.6 333.5 3.2 Political Subdivisions 124.9 1.2 102.6 1.0 Foreign Governments 5.1 - 5.2 -
Total Investments in Governmental Fixed Maturities
22.3 %$ 2,179.9 20.9 % The following table summarizes the fair value of the Company's investments in non-governmental fixed maturities by industry atJune 30, 2021 andDecember 31, 2020 . Jun 30, 2021 Dec 31, 2020 Percentage Percentage of Total of Total (Dollars in Millions) Fair Value Investments Fair Value Investments Finance, Insurance and Real Estate$ 1,993.5 19.1 %$ 1,916.3 18.4 % Manufacturing 1,612.7 15.4 1,633.5 15.7 Transportation, Communication and Utilities 825.4 7.9 825.5 7.9 Services 620.4 5.9 581.3 5.6 Mining 273.1 2.6 285.7 2.7 Retail Trade 165.9 1.6 172.6 1.7 Wholesale Trade 0.4 - 0.5 - Other 10.4 0.1 10.5 0.1 Total Investments in Non-governmental Fixed Maturities$ 5,501.8 52.6 %$ 5,425.9 52.1 % 63
-------------------------------------------------------------------------------- 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 atJune 30, 2021 . (Dollars in Millions) Number of Issues Aggregate Fair Value Below$5 571 $ 1,224.7$5 -$10 194 1,353.6$10 -$20 142 1,884.2$20 -$30 30 723.2 Greater Than$30 9 316.1 Total 946 $ 5,501.8 The Company's short-term investments primarily consist of money market funds,U.S. treasury bills and certificate of deposits. AtJune 30, 2021 , the Company had$348.1 million invested in money market funds which primarily invest inU.S. Treasury securities,$15.5 million invested inU.S. treasury bills and short-term bonds and$7.0 million invested in certificate of deposits with one of the Company's custodial banks. The following table summarizes the fair value of the Company's ten largest investment exposures, excluding investments inU.S. Government and Government Agencies and Authorities and Short-term Investments, atJune 30, 2021 : Percentage Fair of Total (Dollars in Millions) Value Investments Fixed Maturities: States including their Political Subdivisions: Texas$ 140.4 1.3 % California 100.7 1.0 New York 95.0 0.9 Colorado 83.5 0.8 Georgia 76.2 0.7 Louisiana 73.7 0.7 Pennsylvania 68.4 0.7 Massachusetts 61.9 0.6
Vanguard Total World Stock ETF 218.8 2.1 iShares® Core MSCI Total International Stock ETF 88.9 0.9 Total$ 1,007.5 9.7 % 64
-------------------------------------------------------------------------------- Investment Quality and Concentrations (continued) 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. The Company's investments in these limited liability investment companies and limited partnerships are reported either as Equity Method Limited Liability Investments, 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 atJune 30, 2021 andDecember 31, 2020 is presented below. Unfunded Commitment Reported Value Jun 30, Jun 30, Dec 31, (Dollars in Millions) 2021 2021 2020 Reported as Equity Method Limited Liability Investments: Mezzanine Debt$ 55.5 $ 103.5 $ 102.5 Senior Debt 23.6 30.5 28.6 Distressed Debt - 20.6 14.5 Secondary Transactions 12.6 13.9 11.2 Leveraged Buyout 0.1 6.8 3.5 Growth Equity - 0.7 0.7 Real Estate - 30.1 29.9 Hedge Funds - 25.3 - Other - 14.1 13.1 Total Equity Method Limited Liability Investments 91.8 245.5 204.0 Alternative Energy Partnership Investments 31.5 46.6 21.3 Reported as Other Equity Interests at Fair Value: Mezzanine Debt 63.5 128.7 118.3 Senior Debt 19.2 28.0 33.9 Distressed Debt 20.7 38.8 31.8 Secondary Transactions 6.4 4.0 4.2 Hedge Funds 83.7 71.6 Leveraged Buyout 7.5 30.8 30.7 Other 0.7 2.4 1.5 Total Reported as Other Equity Interests at Fair Value 118.0 316.4 292.0
Reported as
Other 0.2 9.2 15.7 Total Reported as Equity Securities at Modified Cost 0.2 9.2 15.7
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.
65
--------------------------------------------------------------------------------Expenses
Expenses for the six and three months ended
Six Months Ended Three Months Ended
Jun 30, Jun 30, Jun 30, Jun 30,
(Dollars in Millions) 2021 2020 2021 2020
Insurance Expenses:
Commissions $ 415.3 $ 367.0 $ 220.1 $ 178.2
General Expenses 166.9 149.7 82.3 79.2
Taxes, Licenses and Fees 52.6 47.9 27.2 23.1
Total Costs Incurred 634.8 564.6 329.6 280.5
Net Policy Acquisition Costs Amortized (Deferred) (63.5) (23.1) (41.1) (9.3)
Amortization of Value of Business Acquired ("VOBA") 26.4 2.8 25.5 1.5
Insurance Expenses 597.7 544.3 314.0 272.7
Interest and Other Expenses:
Interest Expense 22.3 16.4 11.2 8.9
Other Expenses:
Acquisition Related Transaction, Integration and Other Costs 26.7 28.9 10.4 17.1 Other 67.5 50.2 37.7 25.0 Other Expenses 94.2 79.1 48.1 42.1 Interest and Other Expenses 116.5 95.5 59.3 51.0 Total Expenses$ 714.2 $ 639.8 $ 373.3 $ 323.7 Insurance Expenses Insurance Expenses were$597.7 million for the six months endedJune 30, 2021 , compared to$544.3 million for the same period in 2020. Insurance Expenses increased by$53.4 million in 2021 due primarily to growth in business and increased amortization of VOBA with the acquisition of AAC. Insurance Expenses were$314.0 million for the three months endedJune 30, 2021 , compared to$272.7 million for the same period in 2020. Insurance Expenses increased by$272.7 million in 2021 due primarily to growth in business and increased amortization of VOBA with the acquisition of AAC. Interest and Other Expenses Interest and Other Expenses was$116.5 million for the six months endedJune 30, 2021 , compared to$95.5 million for the same period in 2020. Interest expense increased by$5.9 million in 2021 due primarily to the addition of the 2030 Senior Notes inSeptember 2020 . Other expenses increased by$15.1 million in 2021. Interest and Other Expenses was$59.3 million for the three months endedJune 30, 2021 , compared to$51.0 million for the same period in 2020. Interest expense increased by$2.3 million in 2021 due primarily to the addition of the 2030 Senior Notes inSeptember 2020 . Other expenses increased by$6.0 million in 2021. Income Taxes The federal corporate statutory income tax rate was 21% for the six months endedJune 30, 2021 andJune 30, 2020 . The Company's effective income tax rate differs from the federal corporate income tax rate due primarily to (1) the effects of tax-exempt investment income, (2) nontaxable income associated with the change in cash surrender value on COLI, (3)Alternative Energy Partnership 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, and (5) a permanent difference associated with nondeductible executive compensation. Tax-exempt investment income and dividends received deductions collectively were$11.4 million for the six months endedJune 30, 2021 , compared to$9.6 million for the same period in 2020. Tax-exempt investment income and dividends received deductions collectively were$6.4 million for the three months endedJune 30, 2021 , compared to$3.4 million for the same period in 2020. 66 -------------------------------------------------------------------------------- Income Taxes (continued) The nontaxable increase in cash surrender value on COLI was$11.0 million for the six months endedJune 30, 2021 , compared to$5.8 million for the same period in 2020. The nontaxable increase in cash surrender value on COLI was$6.4 million for the three months endedJune 30, 2021 , compared to$2.4 million for the same period in 2020. The Company realized net investment tax credits of$32.3 million and$6.9 million for the six months ended and three months endedJune 30, 2021 , respectively. No investment tax credits were realized for the same periods in 2020. The amount of expense recognized for long-term equity-based compensation expense under GAAP was$1.8 million lower than the amount that would be deductible under the Internal Revenue Code (the "IRC") for the six months endedJune 30, 2021 , compared to$7.1 million lower for the same period in 2020. The amount of expense recognized for long-term equity-based compensation expense under GAAP was$0.3 million lower than the amount that would be deductible under the IRC for the three months endedJune 30, 2021 , compared to$0.4 million lower for the same period in 2020. The amount of nondeductible executive compensation was$7.0 million for the six months endedJune 30, 2021 , compared to$7.1 million for the same period in 2020. The amount of nondeductible executive compensation was$3.5 million for the three months endedJune 30, 2021 , compared to$3.3 million for the same period in 2020. Recently Issued Accounting Pronouncements The Company has adopted all other recently issued accounting pronouncements with effective dates prior toJanuary 1, 2021 . There were no adoptions of such accounting pronouncements during the six months endedJune 30, 2021 that had a material impact on the Company's Condensed Consolidated Financial Statements. See Note 1, "Basis of Presentation and Accounting Policies," to the Condensed Consolidated Financial Statements for additional discussion of recently adopted accounting pronouncements. Liquidity and Capital Resources 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 . OnJune 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 . 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 atJune 30, 2021 andDecember 31, 2020 was: Jun 30, Dec 31, (Dollars in Millions) 2021 2020 Term Loan due July 5, 2023 $ -$ 49.9
5.000% Senior Notes due
448.9 448.8
2.400% Senior Notes due
Total Long-term Debt Outstanding$ 1,122.6 $ 1,172.8 Term Loan Due 2023 OnJune 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"). 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 (and a mutual option to extend the maturity date by one year). OnMarch 16, 2021 , the Company repaid all outstanding borrowings and accrued interest on the 2023 Term Loan in the amount of$50.0 million . 67 -------------------------------------------------------------------------------- Liquidity and Capital Resources (continued) 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 ofJune 30, 2021 . Kemper initially issued$250.0 million of the notes in February of 2015 and issued an additional$200 million of the notes in June of 2017. 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 (the "2030 Senior Notes"). The net proceeds of issuance were$395.8 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. Federal Home Loan Bank Agreements Kemper's subsidiaries, United Insurance,Trinity and Alliance are members of the FHLB ofChicago ,Dallas andSan Francisco , respectively. Alliance became a member of the FHLB ofSan Francisco inAugust 2020 . United Insurance and Trinity became members of the FHLBs ofChicago andDallas , respectively, in 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 atJune 30, 2021 andDecember 31, 2020 , respectively. The carrying value of FHLB ofDallas common stock was$3.4 million atJune 30, 2021 andDecember 31, 2020 , respectively. The carrying value of FHLB ofSan Francisco common stock was$1.7 million atJune 30, 2021 andDecember 31, 2020 , respectively. 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 lending purposes. During the first six months of 2021, United Insurance received advances of$131.9 million from the FHLB ofChicago and made repayments of$157.0 million . United Insurance had outstanding advances from the FHLB ofChicago totaling$382.8 million atJune 30, 2021 . 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$468.0 million atJune 30, 2021 . 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 12, "Policyholder Obligations," to the Condensed 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$200.0 million of Kemper common stock, in addition to the$133.3 million remaining under the previous authorization. The Company repurchased approximately$110.4 million and$158.8 million in 2020 and 2021, respectively, so that, as ofJune 30, 2021 , the remaining share repurchase authorization was$174.6 million under the repurchase program. The amount and timing of any future share 68 -------------------------------------------------------------------------------- Liquidity and Capital Resources (continued) repurchases under the authorization will depend on a variety of factors, including market conditions, the Company's financial condition, results of operations, available liquidity, particular circumstances and other considerations. During the six months endedJune 30, 2021 and 2020, Kemper repurchased and retired approximately 2,045,000 and 1,617,000 shares, respectively, of its common stock under its share repurchase authorization for an aggregate cost of$158.7 million and$110.4 million and an average cost per share of$77.63 and$68.29 , respectively. During the three months endedJune 30, 2021 and 2020, Kemper repurchased and retired approximately 1,451,000 and 128,000 shares, respectively, of its common stock under its share repurchase authorization for an aggregate cost of$111.6 million and$9.2 million and an average cost per share of$76.92 and$71.85 , respectively. Dividends to Shareholders Kemper paid a quarterly dividend to shareholders of$0.31 per common share in the second quarter of 2021. Cash dividends paid were$41.2 million for the six months endedJune 30, 2021 . 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$195.0 million in dividends to Kemper during the first six months of 2021. Kemper estimates that its direct insurance subsidiaries would be able to pay approximately$216.1 million in additional dividends to Kemper during the remainder of 2021 without prior regulatory approval. Sources and Uses of Funds Kemper and its direct non-insurance subsidiaries directly held cash and investments totaling$214.8 million atJune 30, 2021 , compared to$733.2 million atDecember 31, 2020 . 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 . 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 was$237.7 million for the six months endedJune 30, 2021 , compared to$263.8 million for the same period in 2020.Net Cash Used by Financing Activities was$260.8 million for the six months endedJune 30, 2021 , compared to net cash provided of$65.5 million for the same period in 2020. Repayments of long-term debt used$50.0 million of cash for the six months endedJune 30, 2021 . Policyholder Obligations used$24.1 million of cash for the six months endedJune 30, 2021 , compared to net cash provided of$210.1 million for the same period of 2020. Cash of$151.7 million for the six months endedJune 30, 2021 was used to repurchase common stock, compared to$110.4 million used for the same period of 2020. Kemper 69 --------------------------------------------------------------------------------
Liquidity and Capital Resources (continued)
used$41.2 million of cash to pay dividends for the six months endedJune 30, 2021 , compared to$39.7 million of cash used to pay dividends in the same period of 2020. The quarterly dividend rate was$0.31 per common share for the second quarter of 2021, compared to$0.30 per common share in the same period of 2020. 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 in Investing Activities was$77.9 million for the six months endedJune 30, 2021 , compared to$76.8 million for the same period in 2020. Short-term investing activities provided$605.7 million of cash for the six months endedJune 30, 2021 , compared to cash provided of$326.7 million for the same period in 2020. Fixed Maturities investing activities used cash of$241.0 million for the six months endedJune 30, 2021 , compared to$349.7 million for the same period in 2020. Investing activities associated withEquity Securities provided cash of$28.3 million for the six months endedJune 30, 2021 , compared to net cash used of$73.0 million for the same period in 2020. The Company used$100.0 million of cash to purchase corporate-owned life insurance during each of the six months endedJune 30, 2021 and 2020. Net cash used for the acquisition and development of software and long-lived assets was$25.5 million for the six months endedJune 30, 2021 , compared to$39.4 million for the same period in 2020. 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. The Company's critical accounting policies are described in the MD&A included in the 2020 Annual Report. There have been no material changes to the information disclosed in the 2020 Annual Report with respect to these critical accounting estimates and the Company's critical accounting policies. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to the Company's disclosures about market risk in Item 7A, "Quantitative and Qualitative Disclosures About Market Risk of Part II of the 2020 Annual Report. Accordingly, no disclosures about market risk have been made in Item 3 of this Form 10-Q. Item 4. Controls and Procedures (a)Evaluation of disclosure controls and procedures. The Company's management, with the participation of Kemper's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the period covered by this report. Based on such evaluation, Kemper's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed by Kemper in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by theSEC's rules and forms, and accumulated and communicated to the Company's management, including Kemper's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. (b)Changes in internal control over financial reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 70
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