Newswires
KEMPER CORP – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Summary of Results Net Income (Loss) was$(14.7) million ($(0.23) per unrestricted common share) for the nine months endedSeptember 30, 2021 , compared to$312.4 million ($4.75 per unrestricted common share) for the same period in 2020. Net Income (Loss) was$(75.3) million ($(1.18) per unrestricted common share) for the three months endedSeptember 30, 2021 , compared to$122.3 million ($1.87 per unrestricted common share) for the same period in 2020. Beginning inMarch 2020 , the global pandemic associated with COVID-19 and related economic conditions began to impact the Company's results of operations. The Company incurred additional expenses associated with COVID-19 and related economic conditions. For further discussion regarding the potential impacts of COVID-19 and related economic conditions on the Company, see "Caution Regarding Forward-Looking Statements" beginning on page 1 and Item 1A., Risk Factors, of Part II of this Quarterly Report on Form 10-Q. A reconciliation of Net Income (Loss) to Adjusted Consolidated Net Operating Income (Loss) (a non-GAAP financial measure) for the nine and three months endedSeptember 30, 2021 and 2020 is presented below. Nine Months Ended Three Months Ended (Dollars in Millions and Net of Income Sep 30, Sep 30, Increase Sep 30, Sep 30, Increase Taxes) 2021 2020 (Decrease) 2021 2020 (Decrease) Net Income (Loss)$ (14.7) $ 312.4 $ (327.1) $ (75.3) $ 122.3 $ (197.6) Less: Income (Loss) from Change in Fair Value of Equity and Convertible Securities 73.0 (0.8) 73.8 (0.5) 35.7 (36.2) Net Realized Gains on Sales of Investments 34.0 30.2 3.8 7.9 7.9 - Impairment Losses (6.2) (15.8) 9.6 (0.5) (0.8) 0.3 Acquisition Related Transaction, Integration and Other Costs (27.5) (34.2) 6.7 (6.4) (11.4) 5.0 Adjusted Consolidated Net Operating Income (Loss)$ (88.0) $ 333.0
Components of Adjusted Consolidated Net Operating Income (Loss): Segment Net Operating Income (Loss): Specialty Property & Casualty Insurance$ (70.9) $ 246.8
(5.1) (13.4) 8.3 (6.4) (32.7) 26.3 Life & Health Insurance 23.1 50.6 (27.5) 2.8 12.2 (9.4) Total Segment Net Operating Income (Loss) (52.9) 284.0 (336.9) (62.9) 98.7 (161.6) Corporate and Other Net Operating Income (Loss) From: Partial Satisfaction of Judgment - 70.6 (70.6) - - - Other (35.1) (21.6) (13.5) (12.9) (7.8) (5.1) Corporate and Other Net Operating Income (Loss) (35.1) 49.0 (84.1) (12.9) (7.8) (5.1) Adjusted Consolidated Net Operating Income (Loss)$ (88.0) $ 333.0 $ (421.0) $ (75.8) $ 90.9 $ (166.7) Net Income Net Income decreased by$327.1 million for the nine months endedSeptember 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$421.0 million for the nine months endedSeptember 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, partially offset by lowerPreferred Property & Casualty Insurance Segment Net Operating Loss. 39 -------------------------------------------------------------------------------- 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, due primarily to a$73.8 million after-tax increase from the change in fair value of the equity and convertible securities, a$9.6 million after-tax decrease in 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$197.6 million for the three months endedSeptember 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$166.7 million for the three months endedSeptember 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, and Life & Health Insurance Segment Net Operating Income, partially offset by lower Preferred Property & Casualty Insurance Segment Net Operating Loss. See MD&A, "Specialty Property & Casualty Insurance ", "Preferred Property & Casualty Insurance " a nd "Life & Health Insurance ," for discussion of each respective segment's results. Revenues Earned Premiums were$3,894.6 million for the nine months endedSeptember 30, 2021 , compared to$3,458.2 million for the same period in 2020, an increase of$436.4 million . Earned Premiums in theSpecialty Property & Casualty Insurance segment increased by$463.3 million for the nine months endedSeptember 30, 2021 , compared to the same period in 2020. Earned Premiums in thePreferred Property & Casualty Insurance segments decreased by$29.9 million for the nine months endedSeptember 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$1,356.1 million for the three months endedSeptember 30, 2021 , compared to$1,206.5 million for the same period in 2020, an increase of$149.6 million . Earned Premiums in theSpecialty Property & Casualty Insurance segment increased by$156.9 million for the three months endedSeptember 30, 2021 , compared to the same period in 2020. Earned Premiums in thePreferred Property & Casualty Insurance segments decreased by$10.8 million for the three months endedSeptember 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$73.4 million for the nine months endedSeptember 30, 2021 , compared to the same period in 2020, due primarily to an increase in return from Alternative Investments, higher levels of investments in fixed income securities, and higher levels of investments and rate onCompany-Owned Life Insurance , partially offset by lower yields on fixed income securities. Net Investment Income increased by$9.8 million for the three months endedSeptember 30, 2021 , compared to the same period in 2020, due primarily to an increase in return from Alternative Investments, higher levels of investments in fixed income securities, and higher levels of investments and rate onCompany-Owned Life Insurance , partially offset by lower yields on fixed income securities. Loss from the change in value of Alternative Energy Partnership Investments was$46.9 million for the nine months endedSeptember 30, 2021 . Tax benefits related to the Alternative Energy Partnership Investments were$67.9 million , resulting in net income attributable to Alternative Energy Partnership Investments of$21.0 million for the nine months endedSeptember 30, 2021 . Loss from the change in value of Alternative Energy Partnership Investments was$23.8 million for the three months endedSeptember 30, 2021 . Tax benefits related to the Alternative Energy Partnership Investments were$30.6 million , resulting in net income attributable toAlternative Energy Partnership Investments of$6.8 million for the three months endedSeptember 30, 2021 . Other Income was$20.8 million for the nine months endedSeptember 30, 2021 , compared to$92.7 million for the same period in 2020. Other Income for the nine months endedSeptember 30, 2020 included a gain of$89.4 million related to the satisfaction of the CSC Judgment. 40 -------------------------------------------------------------------------------- Summary of Results (continued) Other Income was$12.3 million for the three months endedSeptember 30, 2021 , compared to$0.9 million for the same period in 2020. Net Realized Gains on Sales of Investments were$43.1 million for the nine months endedSeptember 30, 2021 , compared to$38.2 million for the same period in 2020. Net Realized Gains on Sales of Investments were$10.1 million for the three months endedSeptember 30, 2021 , compared to$10.0 million for the same period in 2020. Impairment Losses were$7.8 million for the nine months endedSeptember 30, 2021 , compared to$20.0 million for the same period in 2020. Impairment Losses were$0.6 million for the three months endedSeptember 30, 2021 , compared to$1.0 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 Net Income (Loss) 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 Net Income (Loss). There were no applicable significant non-recurring items that the Company excluded from the calculation of Adjusted Consolidated Net Operating Income for the nine and three months endedSeptember 30, 2021 or 2020. 41 -------------------------------------------------------------------------------- Non-GAAP Financial Measures (continued) 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 or Losses on Sales of Investments and Impairment Losses related to investments included in the Company's results may vary significantly between periods and are generally driven by business decisions and external economic developments such as capital market conditions that impact the values of the Company's investments, the timing of which is unrelated to the insurance underwriting process. Acquisition Related Transaction and Integration Costs may vary significantly between periods and are generally driven by the timing of acquisitions and business decisions which are unrelated to the insurance underwriting process. Debt Extinguishment, Pension and Other Charges relate to (i) loss from early extinguishment of debt, which is driven by the Company's financing and refinancing decisions and capital needs, as well as external economic developments such as debt market conditions, the timing of which is unrelated to the insurance underwriting process; (ii) settlement of pension plan obligations which are business decisions 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. 42 --------------------------------------------------------------------------------Specialty Property & Casualty Insurance Selected financial information for theSpecialty Property & Casualty Insurance segment follows. Nine Months Ended Three Months Ended Sep 30, Sep 30, Sep 30, Sep 30, (Dollars in Millions) 2021 2020 2021 2020 Net Premiums Written$ 3,078.3 $ 2,606.3 $ 1,024.3 $ 914.2 Earned Premiums$ 2,916.2 $ 2,452.9 $ 1,028.3 $ 871.4 Net Investment Income 114.7 76.2 37.0 30.5 Change in Value ofAlternative Energy Partnership Investments (22.3) - (11.3) - Other Income 3.1 1.4 1.2 0.4 Total Revenues 3,011.7 2,530.5 1,055.2 902.3 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE 2,451.8 1,724.6 924.4 589.0 Catastrophe Losses and LAE 13.2 6.8 3.4 2.1 Prior Years: Non-catastrophe Losses and LAE 105.0 16.8 25.1 1.9 Catastrophe Losses and LAE 0.3 0.1 (0.1) (0.1) Total Incurred Losses and LAE 2,570.3 1,748.3 952.8 592.9 Insurance Expenses 570.1 472.8 194.2 159.5 Other Expenses - - - - Operating Income (Loss) (128.7) 309.4 (91.8) 149.9 Income Tax Benefit (Expense) 57.8 (62.6) 32.5 (30.7) Segment Net Operating Income (Loss) $
(70.9)
Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 84.0 % 70.3 % 90.0 % 67.6 % Current Year Catastrophe Losses and LAE Ratio 0.5 0.3 0.3 0.2 Prior Years Non-catastrophe Losses and LAE Ratio 3.6 0.7 2.4 0.2 Prior Years Catastrophe Losses and LAE Ratio - - - - Total Incurred Loss and LAE Ratio 88.1 71.3 92.7 68.0 Insurance Expense Ratio 19.5 19.3 18.9 18.3 Combined Ratio 107.6 % 90.6 % 111.6 % 86.3 % Underlying Combined Ratio Current Year Non-catastrophe Losses and LAE Ratio 84.0 % 70.3 % 90.0 % 67.6 % Insurance Expense Ratio 19.5 19.3 18.9 18.3 Underlying Combined Ratio 103.5 % 89.6 % 108.9 % 85.9 % Non-GAAP Measure Reconciliation Combined Ratio 107.6 % 90.6 % 111.6 % 86.3 %
Less:
Current Year Catastrophe Losses and LAE Ratio 0.5 0.3 0.3 0.2
Prior Years Non-catastrophe Losses and LAE Ratio 3.6 0.7 2.4 0.2
Prior Years Catastrophe Losses and LAE Ratio - - - -
Underlying Combined Ratio 103.5 % 89.6 % 108.9 % 85.9 %
43
--------------------------------------------------------------------------------Specialty Property & Casualty Insurance (continued) Insurance Reserves Sep 30, Dec 31, (Dollars in Millions) 2021 2020 Insurance Reserves: Non-Standard Automobile$ 1,841.1 $ 1,308.3 Commercial Automobile 302.4 236.5 Insurance Reserves$ 2,143.5 $ 1,544.8 Insurance Reserves: Loss and Allocated LAE Reserves: Case and Allocated LAE$ 1,071.1 $ 744.6 Incurred But Not Reported 881.6 653.6 Total Loss and LAE Reserves 1,952.7 1,398.2 Unallocated LAE Reserves 190.8 146.6 Insurance Reserves$ 2,143.5 $ 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 Nine Months EndedSeptember 30, 2021 Compared to the Same Period in 2020The Specialty Property & Casualty Insurance segment reported a Segment Net Operating Loss of$70.9 million for the nine months endedSeptember 30, 2021 , compared to Segment Net Operating Income of$246.8 million for the same period in 2020. Segment Net Operating Income decreased by$317.7 million due primarily to an increase in underlying losses and LAE as a percentage of earned premiums related to higher claim frequency and severity trends and adverse loss reserve development, partially offset by 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$463.3 million for the nine months endedSeptember 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$38.5 million for the nine months endedSeptember 30, 2021 , compared to the same period in 2020, due primarily to an increase in return from Alternative Investments, higher levels of investments in fixed income securities, and higher levels of investments and rate onCompany-Owned Life Insurance , partially offset by lower yields on fixed income securities. Loss related to Changes in Value of Alternative Energy Partnership Investments was$22.3 million for the nine months endedSeptember 30, 2021 . Tax benefits related to the Alternative Energy Partnership Investments were$32.2 million , resulting in net income attributable toAlternative Energy Partnership Investments of$9.9 million for the nine months endedSeptember 30, 2021 . Underlying losses and LAE as a percentage of earned premiums were 84.0% in 2021, a deterioration of 13.7 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$105.3 million in 2021, compared to adverse development of$16.9 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 other liability coverages. Catastrophe losses and LAE (excluding reserve development) were$13.2 million in 2021, compared to$6.8 million in 2020, a deterioration of$6.4 million . 44 --------------------------------------------------------------------------------Specialty Property & Casualty Insurance (continued) Insurance Expenses were$570.1 million , or 19.5% of earned premiums, in 2021, a deterioration of 0.2 percentage point compared to 2020, driven primarily by the amortization of intangible assets arising from the acquisition of AAC 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 EndedSeptember 30, 2021 Compared to the Same Period in 2020The Specialty Property & Casualty Insurance segment reported a Segment Net Operating Loss of$59.3 million for the three months endedSeptember 30, 2021 , compared to Segment Net Operating Income of$119.2 million for the same period in 2020. Segment Net Operating Income decreased by$178.5 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 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$156.9 million for the three months endedSeptember 30, 2021 , compared to the same period in 2020, driven by the acquisition of AAC 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$6.5 million for the three months endedSeptember 30, 2021 , compared to the same period in 2020, due primarily to an increase in return from Alternative Investments, higher levels of investments in fixed income securities, and higher levels of investments and rate onCompany-Owned Life Insurance , partially offset by lower yields on fixed income securities. Loss related to Change in Value of Alternative Energy Partnership Investments was$11.3 million for the three months endedSeptember 30, 2021 . Tax benefits related to the Alternative Energy Partnership Investments were$14.4 million , resulting in net income attributable toAlternative Energy Partnership Investments of$3.1 million for the three months endedSeptember 30, 2021 . Underlying losses and LAE as a percentage of earned premiums were 90.0% in 2021, a deterioration of 22.4 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$25.0 million in 2021, compared to adverse development of$1.8 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 other liability coverages. Catastrophe losses and LAE (excluding reserve development) were$3.4 million in 2021, compared to$2.1 million in 2020, a deterioration of$1.3 million . Insurance Expenses were$194.2 million , or 18.9% of earned premiums, in 2021, a deterioration of 0.6 percentage points compared to 2020, driven primarily by amortization of intangible assets arising from the AAC acquisition.The Specialty Property & Casualty Insurance segment's effective income tax rate differs from the federal statutory income tax rate due primarily to investment tax credits, tax-exempt investment income and dividends received deductions. 45 --------------------------------------------------------------------------------Specialty Property & Casualty Insurance (continued)Specialty Personal Automobile Insurance Selected financial information for the specialty personal automobile insurance product line follows. Nine Months Ended Three Months Ended Sep 30, Sep 30, Sep 30, Sep 30, (Dollars in Millions) 2021 2020 2021 2020 Net Premiums Written$ 2,728.5 $ 2,350.2 $ 902.7 $ 819.4 Earned Premiums$ 2,615.6 $ 2,235.2 $ 920.6 $ 792.2 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE$ 2,235.4
Catastrophe Losses and LAE
12.1 6.4 3.1 2.0Prior Years : Non-catastrophe Losses and LAE 96.7 31.1 25.1 2.1 Catastrophe Losses and LAE 0.3 0.2 (0.1) (0.1) Total Incurred Losses and LAE$ 2,344.5
Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 85.4 % 71.2 % 91.7 % 68.5 % Current Year Catastrophe Losses and LAE Ratio 0.5 0.3 0.3 0.3 Prior Years Non-catastrophe Losses and LAE Ratio 3.7 1.4 2.7 0.3 Prior Years Catastrophe Losses and LAE Ratio - - - - Total Incurred Loss and LAE Ratio 89.6 % 72.9 % 94.7 % 69.1 % Nine Months EndedSeptember 30, 2021 Compared to the Same Period in 2020 Earned Premiums from specialty personal automobile insurance increased by$380.4 million for the nine months endedSeptember 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$2,344.5 million , or 89.6% of earned premiums in 2021, compared to$1,629.5 million , or 72.9% 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 premium as well as higher adverse loss and LAE reserve development. Underlying losses and LAE as a percentage of earned premiums were 85.4% in 2021, compared to 71.2% in 2020, a deterioration of 14.2 points due to higher claim frequency and severity trends. Adverse loss and LAE reserve development was$97.0 million in 2021, compared to adverse development of$31.3 million in 2020, primarily driven by legal developments and increased severity in personal injury protection coverage inFlorida and other liability coverages. Catastrophe losses and LAE (excluding reserve development) were$12.1 million in 2021, compared to$6.4 million in 2020. Three Months EndedSeptember 30, 2021 Compared to the Same Period in 2020 Earned Premiums from specialty personal automobile insurance increased by$128.4 million for the three months endedSeptember 30, 2021 , compared to the same period in 2020, due primarily to the acquisition of AAC and higher volume. Incurred losses and LAE were$872.0 million , or 94.7% of earned premiums in 2021, compared to$547.4 million , or 69.1% 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 premium as well as higher adverse loss and LAE reserve development. Underlying losses and LAE as a percentage of related earned premiums were 91.7% in 2021, compared to 68.5% in 2020, a deterioration of 23.2 points due to higher claim frequency and severity trends. Adverse loss and LAE reserve development was$25.0 million in 2021, primarily driven by legal developments and increased severity in personal injury protection coverage inFlorida and other liability coverages, compared to adverse development of$2.0 million in 2020. Catastrophe losses and LAE (excluding reserve development) were$3.1 million in 2021, compared to$2.0 million in 2020. 46 --------------------------------------------------------------------------------Specialty Property & Casualty Insurance (continued)Commercial Automobile Insurance Selected financial information for the commercial automobile insurance product line follows. Nine Months Ended Three Months Ended Sep 30, Sep 30, Sep 30, Sep 30, (Dollars in Millions) 2021 2020 2021 2020 Net Premiums Written$ 349.8 $ 256.1 $ 121.6 $ 94.8 Earned Premiums$ 300.6 $ 217.7 $ 107.7 $ 79.2 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE$ 216.4
Catastrophe Losses and LAE
1.1 0.4 0.3 0.1Prior Years : Non-catastrophe Losses and LAE 8.3 (14.3) - (0.2) Catastrophe Losses and LAE - (0.1) - - Total Incurred Losses and LAE$ 225.8
Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 71.9 % 61.0 % 74.7 % 57.6 % Current Year Catastrophe Losses and LAE Ratio 0.4 0.2 0.3 0.1 Prior Years Non-catastrophe Losses and LAE Ratio 2.8 (6.6) - (0.3) Prior Years Catastrophe Losses and LAE Ratio - - - - Total Incurred Loss and LAE Ratio 75.1 % 54.6 % 75.0 % 57.4 % Nine Months EndedSeptember 30, 2021 Compared to the Same Period in 2020 Earned Premiums from commercial automobile insurance increased by$82.9 million for the nine months endedSeptember 30, 2021 , compared to the same period in 2020, due primarily to higher volume. Incurred losses and LAE were$225.8 million , or 75.1% of earned premiums in 2021, compared to$118.8 million , or 54.6% 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 71.9% in 2021, compared to 61.0% in 2020, a deterioration of 10.9 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$14.4 million in 2020. Three Months EndedSeptember 30, 2021 Compared to the Same Period in 2020 Earned Premiums from commercial automobile insurance increased by$28.5 million for the three months endedSeptember 30, 2021 , compared to the same period in 2020, due primarily to higher volume. Incurred losses and LAE were$80.8 million , or 75.0% of earned premiums in 2021, compared to$42.0 million , or 57.4% 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 74.7% in 2021, compared to 57.6% in 2020, a deterioration of 17.1 percentage points due primarily to higher claim severity trends. There was no loss and LAE reserve development in 2021, compared to favorable reserve development of$0.2 million in 2020. 47 --------------------------------------------------------------------------------Preferred Property & Casualty Insurance Selected financial information for thePreferred Property & Casualty Insurance segment follows. Nine Months Ended Three Months Ended Sep 30, Sep 30, Sep 30, Sep 30, (Dollars in Millions) 2021 2020 2021 2020 Net Premiums Written$ 488.8 $ 497.8 $ 164.8 $ 172.2 Earned Premiums$ 489.1 $ 519.0 $ 163.7 $ 174.5 Net Investment Income 51.5 24.3 16.1 10.3 Changes in Value ofAlternative Energy Partnership Investments (12.5) - (6.4) - Other Income - 0.1 - - Total Revenues 528.1 543.4 173.4 184.8 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE 328.0 293.8 115.6 102.8 Catastrophe Losses and LAE 71.6 87.3 23.4 61.9 Prior Years: Non-catastrophe Losses and LAE 5.1 11.2 - 6.3 Catastrophe Losses and LAE (3.6) (0.6) 0.1 0.1 Total Incurred Losses and LAE 401.1 391.7 139.1 171.1 Insurance Expenses 154.8 169.7 51.7 55.5 Operating Income (Loss) (27.8) (18.0) (17.4) (41.8) Income Tax Benefit (Expense) 22.7 4.6 11.0 9.1 Segment Net Operating Income (Loss)$ (5.1)
Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 67.1 % 56.6 % 70.6 % 58.9 % Current Year Catastrophe Losses and LAE Ratio 14.6 16.8 14.3 35.5 Prior Years Non-catastrophe Losses and LAE Ratio 1.0 2.2 - 3.6 Prior Years Catastrophe Losses and LAE Ratio (0.7) (0.1) 0.1 0.1 Total Incurred Loss and LAE Ratio 82.0 75.5 85.0 98.1 Insurance Expense Ratio 31.6 32.7 31.6 31.8 Combined Ratio 113.6 % 108.2 % 116.6 % 129.9 % Underlying Combined Ratio Current Year Non-catastrophe Losses and LAE Ratio 67.1 % 56.6 % 70.6 % 58.9 % Insurance Expense Ratio 31.6 32.7 31.6 31.8 Underlying Combined Ratio 98.7 % 89.3 % 102.2 % 90.7 % Non-GAAP Measure Reconciliation Combined Ratio 113.6 % 108.2 % 116.6 % 129.9 %
Less:
Current Year Catastrophe Losses and LAE Ratio 14.6 16.8 14.3 35.5
Prior Years Non-catastrophe Losses and LAE Ratio 1.0 2.2 - 3.6
Prior Years Catastrophe Losses and LAE Ratio (0.7) (0.1) 0.1 0.1
Underlying Combined Ratio 98.7 % 89.3 % 102.2 % 90.7 %
48
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Catastrophe Frequency and Severity
Nine Months Ended
Sep 30, 2021 Sep 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 45 $ 36.5 48 $ 38.4
$5 - $10 3 20.4 3 21.4
$10 - $15 1 14.7 1 10.6
$15 - $20 - - 1 16.9
$20 - $25 - - - -
Greater Than $25 - - - -
Total 49 $ 71.6 53 $ 87.3
Insurance Reserves
Sep 30, Dec 31,
(Dollars in Millions) 2021 2020
Insurance Reserves:
Preferred Automobile $ 290.0 $ 281.3
Homeowners 108.5 104.0
Other 30.1 26.3
Insurance Reserves $ 428.6 $ 411.6
Insurance Reserves:
Loss and Allocated LAE Reserves:
Case and Allocated LAE $ 280.8 $ 262.2
Incurred But Not Reported 120.4 122.0
Total Loss and LAE Reserves 401.2 384.2
Unallocated LAE Reserves 27.4 27.4
Insurance Reserves $ 428.6 $ 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
Nine Months Ended September 30, 2021 Compared to the Same Period in 2020
The Preferred Property & Casualty Insurance segment reported a Segment Net
Operating Loss of $5.1 million for the nine months ended September 30, 2021 ,
compared to Segment Net Operating Loss of $13.4 million for the same period in
2020. Segment Net Operating Loss decreased by $8.3 million due primarily to
lower catastrophe losses and LAE, lower levels of adverse loss and LAE reserve
development and higher net investment income, partially offset by higher
underlying losses and LAE as a percentage of earned premiums.
Earned Premiums in the Preferred Property & Casualty Insurance segment decreased
by $29.9 million for the nine months ended September 30, 2021 , compared to the
same period in 2020, due primarily to lower automobile and homeowners insurance
volumes and ongoing profit improvement actions.
49
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Preferred Property & Casualty Insurance (continued)
Net Investment Income in the Preferred Property & Casualty Insurance segment
increased by $27.2 million for the nine months ended September 30, 2021 ,
compared to the same period in 2020, due primarily to an increase in return from
Alternative Investments, higher levels of investments in fixed income
securities, and higher levels of investments and rate on Company-Owned Life
Insurance , partially offset by lower yields on fixed income securities.
Loss related to Changes in Value of Alternative Energy Partnership Investments
was $12.5 million for the nine months ended September 30, 2021 . Tax benefits
related to the Alternative Energy Partnership Investments were $18.1 million ,
resulting in net income attributable to Alternative Energy Partnership
Investments of $5.6 million for the nine months ended September 30, 2021 .
Underlying losses and LAE as a percentage of earned premiums were 67.1% in 2021,
a deterioration of 10.5 percentage points, compared to 2020. Catastrophe losses
and LAE (excluding reserve development) were $71.6 million in 2021, compared to
$87.3 million in 2020, a decrease of $15.7 million . Catastrophe losses and LAE
(excluding reserve development) decreased due primarily to a decrease in
severity of catastrophic events in 2021 compared to 2020. There were four
catastrophic events above $5 million in 2021, compared to five catastrophic
events above $5 million in 2020. Adverse loss and LAE reserve development
(including catastrophe reserve development) was $1.5 million in 2021, compared
to $10.6 million in 2020.
Insurance expenses were $154.8 million , or 31.6% of earned premiums in 2021, an
improvement of 1.1% 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 September 30, 2021 Compared to the Same Period in 2020
The Preferred Property & Casualty Insurance segment reported a Segment Net
Operating Loss of $6.4 million for the three months ended September 30, 2021 ,
compared to Segment Net Operating Loss of $32.7 million for the same period in
2020. Segment Net Operating Loss decreased by $26.3 million due primarily to
lower catastrophe losses and LAE (excluding loss reserve development) and higher
net investment income, partially offset by higher underlying losses and LAE as a
percentage of earned premiums.
Earned Premiums in the Preferred Property & Casualty Insurance segment decreased
by $10.8 million for the three months ended September 30, 2021 , compared to the
same period in 2020, due primarily to lower automobile and homeowners insurance
volumes and ongoing profit improvement actions.
Net Investment Income in the Preferred Property & Casualty Insurance segment
increased by $5.8 million for the three months ended September 30, 2021 ,
compared to the same period in 2020, due primarily to an increase in return from
Alternative Investments, higher levels of investments in fixed income
securities, and higher levels of investments and rate on Company-Owned Life
Insurance , partially offset by lower yields on fixed income securities.
Loss related to Changes in Value of Alternative Energy Partnership Investments
was $6.4 million for the three months ended September 30, 2021 . Tax benefits
related to the Alternative Energy Partnership Investments were $8.2 million ,
resulting in net income attributable to Alternative Energy Partnership
Investments of $1.8 million for the three months ended September 30, 2021 .
Underlying losses and LAE as a percentage of earned premiums were 70.6% in 2021,
a deterioration of 11.7 percentage points, compared to 2020, primarily from
Preferred Personal Automobile Insurance and Other Personal Insurance .
Catastrophe losses and LAE (excluding reserve development) were $23.4 million in
2021, compared to $61.9 million in 2020, an increase of $38.5 million .
Catastrophe losses and LAE (excluding reserve development) decreased due
primarily to a decrease in severity of catastrophic events in 2021, compared to
2020. There was one catastrophic event above $5 million in 2021, compared to
five catastrophic events above $5 million in 2020. Adverse loss and LAE reserve
development (including catastrophe reserve development) was $0.1 million in
2021, compared to $6.4 million in 2020.
Insurance expenses were $51.7 million , or 31.6% of earned premiums in 2021, an
improvement of 0.2% 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.
50
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Preferred Property & Casualty Insurance (continued)
Preferred Personal Automobile Insurance
Selected financial information for the preferred personal automobile insurance
product line follows.
Nine Months Ended Three Months Ended
Sep 30, Sep 30, Sep 30, Sep 30,
(Dollars in Millions) 2021 2020 2021 2020
Net Premiums Written $ 304.7 $ 308.7 $ 99.9 $ 107.2
Earned Premiums $ 309.1 $ 324.6 $ 102.6 $ 110.6
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE $ 234.2
Catastrophe Losses and LAE
6.1 4.0 2.7 1.8Prior Years : Non-catastrophe Losses and LAE 4.9 17.8 0.1 5.9 Catastrophe Losses and LAE - (0.6) 0.1 (0.2) Total Incurred Losses and LAE$ 245.2
Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 75.7 % 62.2 % 82.7 % 65.4 % Current Year Catastrophe Losses and LAE Ratio 2.0 1.2 2.6 1.6 Prior Years Non-catastrophe Losses and LAE Ratio 1.6 5.5 0.1 5.3 Prior Years Catastrophe Losses and LAE Ratio - (0.2) 0.1 (0.2) Total Incurred Loss and LAE Ratio 79.3 % 68.7 % 85.5 % 72.1 % Nine Months EndedSeptember 30, 2021 Compared to the Same Period in 2020 Earned Premiums on preferred automobile insurance decreased by$15.5 million for the nine months endedSeptember 30, 2021 , compared to the same period in 2020, due primarily to lower volume and ongoing profit improvement actions. Incurred losses and LAE were$245.2 million , or 79.3% of earned premiums, in 2021, compared to$223.1 million , or 68.7% 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 loss and LAE reserve development. Underlying losses and LAE as a percentage of earned premiums were 75.7% in 2021, compared to 62.2% in 2020, a deterioration of 13.5 percentage points primarily due to higher claim frequency and severity trends. Adverse loss and LAE reserve development (including catastrophe loss reserve development) was$4.9 million in 2021, compared to$17.2 million in 2020. Catastrophe losses and LAE (excluding reserve development) were$6.1 million in 2021, compared to$4.0 million in 2020. Three Months EndedSeptember 30, 2021 Compared to the Same Period in 2020 Earned Premiums on preferred automobile insurance decreased by$8.0 million for the three months endedSeptember 30, 2021 , compared to the same period in 2020, due primarily to lower volume and ongoing profit improvement actions. Incurred losses and LAE were$87.7 million , or 85.5% of earned premiums, in 2021, compared to$79.7 million , or 72.1% 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 loss and LAE reserve development. Underlying losses and LAE as a percentage of earned premiums were 82.7% in 2021, compared to 65.4% in 2020, a deterioration of 17.3 percentage points primarily due to higher claim frequency and severity trends. Adverse loss and LAE reserve development (including catastrophe loss reserve development) was$0.2 million in 2021, compared to$5.7 million in 2020. Catastrophe losses and LAE (excluding reserve development) were$2.7 million in 2021, compared to$1.8 million in 2020. 51 --------------------------------------------------------------------------------Preferred Property & Casualty Insurance (continued)Homeowners Insurance Selected financial information for the homeowners insurance product line follows. Nine Months Ended Three Months Ended Sep 30, Sep 30, Sep 30, Sep 30, (Dollars in Millions) 2021 2020 2021 2020 Net Premiums Written$ 158.5 $ 162.8 $ 56.1 $ 55.7 Earned Premiums$ 154.6 $ 167.4 $ 52.5 $ 55.0 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE$ 81.3 $ 82.2 $ 26.6 $ 28.1 Catastrophe Losses and LAE 64.2 81.3 20.4 58.6 Prior Years: Non-catastrophe Losses and LAE (2.5) (3.1) (0.2) 2.0 Catastrophe Losses and LAE (1.8) 0.1 0.1 0.2 Total Incurred Losses and LAE$ 141.2 $ 160.5 $ 46.9 $ 88.9 Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 52.6 % 49.1 % 50.6 % 51.1 % Current Year Catastrophe Losses and LAE Ratio 41.5 48.6 38.9 106.5 Prior Years Non-catastrophe Losses and LAE Ratio (1.6) (1.9) (0.4) 3.6 Prior Years Catastrophe Losses and LAE Ratio (1.2) 0.1 0.2 0.4 Total Incurred Loss and LAE Ratio 91.3 % 95.9 % 89.3 % 161.6 % Nine Months EndedSeptember 30, 2021 Compared to the Same Period in 2020 Earned Premiums in homeowners insurance decreased by$12.8 million for the nine months endedSeptember 30, 2021 , compared to the same period in 2020, due primarily to lower volume and ongoing profit improvement actions. Incurred losses and LAE were$141.2 million , or 91.3% of earned premiums, in 2021, compared to$160.5 million , or 95.9% of earned premiums, in 2020. Incurred losses and LAE as a percentage of earned premiums decreased due primarily to lower incurred catastrophe losses (excluding loss reserve development), partially offset by higher underlying losses and LAE as a percentage of earned premiums. Underlying losses and LAE as a percentage of earned premiums were 52.6% in 2021, compared to 49.1% in 2020, a deterioration of 3.5 percentage points. Catastrophe losses and LAE (excluding reserve development) were$64.2 million in 2021, compared to$81.3 million in 2020. There were four catastrophic events above$5 million in 2021, compared to five catastrophic events above$5 million in 2020. Favorable loss and LAE reserve development (including catastrophe loss reserve development) was$4.3 million in 2021, compared to$3.0 million in 2020. Three Months EndedSeptember 30, 2021 Compared to the Same Period in 2020 Earned Premiums in homeowners insurance decreased by$2.5 million for the three months endedSeptember 30, 2021 , compared to the same period in 2020, due primarily to lower volume and ongoing profit improvement actions. Incurred losses and LAE were$46.9 million , or 89.3% of earned premiums, in 2021, compared to$88.9 million , or 161.6% of earned premiums, in 2020. Incurred losses and LAE as a percentage of earned premiums decreased due primarily to lower incurred catastrophe losses (excluding loss reserve development) and lower underlying losses and LAE as a percentage of earned premiums. Underlying losses and LAE as a percentage of earned premiums were 50.6% in 2021, compared to 51.1% in 2020, a decrease of 0.5 percentage points. Catastrophe losses and LAE (excluding reserve development) were$20.4 million in 2021, compared to$58.6 million in 2020. There was one catastrophic event above$5 million in 2021, compared to five catastrophic events above$5 million in 2020. Favorable loss and LAE reserve development (including catastrophe loss reserve development) was$0.1 million in 2021, compared to adverse loss and LAE development of$2.2 million in 2020. 52 --------------------------------------------------------------------------------
Other Personal Insurance
Other personal insurance products include umbrella, dwelling fire, inland
marine, earthquake, boat owners and other liability coverages. Selected
financial information for other personal insurance product lines follows.
Nine Months Ended Three Months Ended
Sep 30, Sep 30, Sep 30, Sep 30,
(Dollars in Millions) 2021 2020 2021 2020
Net Premiums Written $ 25.6 $ 26.3 $ 8.8 $ 9.3
Earned Premiums $ 25.4 $ 27.0 $ 8.6 $ 8.9
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE $ 12.5 $ 9.7 $ 4.2 $ 2.5
Catastrophe Losses and LAE 1.3 2.0 0.3 1.5
Prior Years:
Non-catastrophe Losses and LAE 2.7 (3.5) 0.1 (1.6)
Catastrophe Losses and LAE (1.8) (0.1) (0.1) 0.1
Total Incurred Losses and LAE $ 14.7 $ 8.1 $ 4.5 $ 2.5
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio 49.3 % 36.0 % 48.8 % 28.1 %
Current Year Catastrophe Losses and LAE Ratio 5.1 7.4 3.5 16.9
Prior Years Non-catastrophe Losses and LAE Ratio 10.6 (13.0) 1.2 (18.0)
Prior Years Catastrophe Losses and LAE Ratio (7.1) (0.4) (1.2) 1.1
Total Incurred Loss and LAE Ratio 57.9 % 30.0 % 52.3 % 28.1 %
Nine Months Ended September 30, 2021 Compared to the Same Period in 2020
Earned Premiums on other personal insurance decreased by $1.6 million for the
nine months ended September 30, 2021 , compared to the same period in 2020.
Incurred losses and LAE were $14.7 million , or 57.9% of earned premiums, in
2021, compared to $8.1 million , or 30.0% of earned premiums, in 2020. Underlying
losses and LAE as a percentage of earned premiums were 49.3% in 2021, compared
to 36.0% in 2020, a deterioration of 13.3 percentage points. Catastrophe losses
and LAE (excluding loss reserve development) were $1.3 million in 2021, compared
to $2.0 million in 2020. Adverse loss and LAE reserve development (including
catastrophe losses development) was $0.9 million in 2021, compared to favorable
development of $3.6 million in 2020.
Three Months Ended September 30, 2021 Compared to the Same Period in 2020
Earned Premiums on other personal insurance decreased by $0.3 million for the
three months ended September 30, 2021 , compared to the same period in 2020.
Incurred losses and LAE were $4.5 million , or 52.3% of earned premiums, in 2021,
compared to $2.5 million , or 28.1% of earned premiums, in 2020. Underlying
losses and LAE as a percentage of earned premiums were 48.8% in 2021, compared
to 28.1% in 2020, a deterioration of 20.7 percentage points. Catastrophe losses
and LAE (excluding loss reserve development) were $0.3 million in 2021, compared
to $1.5 million in 2020. There was no loss and LAE reserve development
(including catastrophe losses development) in 2021, compared to favorable
development of $1.5 million in 2020.
53
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Life & Health Insurance
Selected financial information for the Life & Health Insurance segment follows.
Nine Months Ended Three Months Ended
Sep 30, Sep 30, Sep 30, Sep 30,
(Dollars in Millions) 2021 2020 2021 2020
Earned Premiums $ 489.3 $ 486.3 $ 164.1 $ 160.6
Net Investment Income 151.9 146.0 48.4 50.7
Changes in Value of Alternative Energy Partnership
Investments (12.1) - (6.1) -
Other Income 0.3 0.6 0.1 -
Total Revenues 629.4 632.9 206.5 211.3
Policyholders' Benefits and Incurred Losses and LAE 353.5 320.2 119.5 113.6
Insurance Expenses 269.4 251.1 92.9 82.5
Operating Income (Loss) 6.5 61.6 (5.9) 15.2
Income Tax Benefit (Expense) 16.6 (11.0) 8.7 (3.0)
Segment Net Operating Income (Loss) $ 23.1 $ 50.6 $ 2.8 $ 12.2
Insurance Reserves
Sep 30, Dec 31,
(Dollars in Millions) 2021 2020
Insurance Reserves:
Future Policyholder Benefits $ 3,436.1 $ 3,440.5
Incurred Losses and LAE Reserves:
Life 62.3 61.1
Accident and Health 25.7 25.9
Property 7.4 4.6
Total Incurred Losses and LAE Reserves 95.4 91.6
Insurance Reserves $ 3,531.5 $ 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 has 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 was recognized during the first and second
quarters of 2020.
Overall
Nine Months Ended September 30, 2021 Compared to the Same Period in 2020
Earned Premiums in the Life & Health Insurance segment increased by $3.0 million
for the nine months ended September 30, 2021 , compared to the same period in
2020. Earned Premiums increased due primarily to higher volume on life insurance
products partially offset by lower volume on accident and health insurance
products and property insurance products as well as a reduction in the estimated
return premium reserve for insurance products subject to minimum loss ratio
("MLR") in 2020.
Net Investment Income increased by $5.9 million in 2021, compared to 2020, due
primarily to an increase in return from Alternative Investments, higher levels
of investments in fixed income securities, and higher levels of investments and
rate on Company-Owned Life Insurance , partially offset by lower yields on fixed
income securities.
54
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Life & Health Insurance (continued)
Loss related to Changes in Value of Alternative Energy Partnership Investments
was $12.1 million for the nine months ended September 30, 2021 . Tax benefits
related to the Alternative Energy Partnership Investments were $17.6 million ,
resulting in net income attributable to Alternative Energy Partnership
Investments of $5.5 million for the nine months ended September 30, 2021 .
Policyholders' Benefits and Incurred Losses and LAE increased by $33.3 million
in 2021, compared to 2020, due primarily to higher mortality for life insurance
related to COVID-19, higher persistency on life insurance, 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 Life & Health Insurance segment increased by $18.3
million in 2021, compared to 2020, due primarily to higher commission expense
driven by increased persistency and investments made to modernize and strengthen
the distribution channel and enhance the capabilities of the business.
Segment Net Operating Income in the Life & Health Insurance segment was $23.1
million for the nine months ended September 30, 2021 , compared to $50.6 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 Ended September 30, 2021 Compared to the Same Period in 2020
Earned Premiums in the Life & Health Insurance segment increased by $3.5 million
for the three months ended September 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.
Net Investment Income decreased by $2.3 million in 2021, compared to 2020, due
primarily to an increase in return from Alternative Investments, higher levels
of investments in fixed income securities, and higher levels of investments and
rate on Company-Owned Life Insurance , 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 three months ended September 30, 2021 . Tax benefits
related to the Alternative Energy Partnership Investments were $8.0 million ,
resulting in net income attributable to Alternative Energy Partnership
Investments of $1.9 million for the three months ended September 30, 2021 .
Policyholders' Benefits and Incurred Losses and LAE increased by $5.9 million in
2021, compared to 2020, due primarily to higher persistency, higher frequency
and severity of claims in accident and health insurance, and higher catastrophe
losses in property insurance.
Insurance Expenses in the Life & Health Insurance segment increased by $10.4
million in 2021, compared to 2020, due primarily to higher commission expense
driven by increased persistency and investments made to modernize and strengthen
the distribution channel and enhance the capabilities of the business.
Segment Net Operating Income in the Life & Health Insurance segment was $2.8
million for the three months ended September 30, 2021 , compared to $12.2 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.
55
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Life & Health Insurance (continued)
Life Insurance
Selected financial information for the life insurance product line follows.
Nine Months Ended Three Months Ended
Sep 30, Sep 30, Sep 30, Sep 30,
(Dollars in Millions) 2021 2020 2021 2020
Earned Premiums $ 300.2 $ 289.2 $ 101.5 $ 96.3
Net Investment Income 147.5 141.0 47.0 47.5
Changes in Value of Alternative Energy Partnership
Investments (11.5) - (5.8) -
Other Income - 0.1 - -
Total Revenues 436.2 430.3 142.7 143.8
Policyholders' Benefits and Incurred Losses and LAE 257.1 228.8 87.3 84.0
Insurance Expenses 175.1 165.9 61.5 54.7
Operating Income (Loss) 4.0 35.6 (6.1) 5.1
Income Tax Benefit (Expense) 16.3 (5.5) 8.4 (0.8)
Total Product Line Net Operating Income (Loss) $ 20.3 $ 30.1 $ 2.3 $ 4.3
Nine Months Ended September 30, 2021 Compared to the Same Period in 2020
Earned Premiums from life insurance increased by $11.0 million for the nine
months ended September 30, 2021 , compared to the same period in 2020, due
primarily to increased new business and higher persistency. Policyholders'
Benefits and Incurred Losses and LAE on life insurance were $257.1 million in
2021, compared to $228.8 million in 2020, an increase of $28.3 million due
primarily to higher mortality related to COVID-19, higher persistency, and the
impact of reducing the Company's estimate of the ultimate cost of using death
verification databases in the Company's operation in 2020.
Insurance Expenses increased by $9.2 million in 2021, compared to 2020, due
primarily to higher commission expense driven by increased persistency and
investments made to modernize and strengthen the distribution channel and
enhance the capabilities of the business.
Three Months Ended September 30, 2021 Compared to the Same Period in 2020
Earned Premiums from life insurance increased by $5.2 million for the three
months ended September 30, 2021 , compared to the same period in 2020, due
primarily to higher persistency. Policyholders' Benefits and Incurred Losses and
LAE on life insurance were $87.3 million in 2021, compared to $84.0 million in
2020, an increase of $3.3 million due primarily to higher persistency.
Insurance Expenses increased by $6.8 million in 2021, compared to 2020, due
primarily to higher commission expense driven by increased persistency and
investments made to modernize and strengthen the distribution channel and
enhance the capabilities of the business.
56
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Life & Health Insurance (continued)
Accident and Health Insurance
Selected financial information for the accident and health insurance product
line follows.
Nine Months Ended Three Months Ended
Sep 30, Sep 30, Sep 30, Sep 30,
(Dollars in Millions) 2021 2020 2021 2020
Earned Premiums $ 142.3 $ 149.1 $ 47.0 $ 48.9
Net Investment Income 2.7 4.7 0.9 3.1
Changes in Value of Alternative Energy Partnership
Investments (0.2) - (0.1) -
Other Income 0.3 0.5 0.1 -
Total Revenues 145.1 154.3 47.9 52.0
Policyholders' Benefits and Incurred Losses and LAE 74.2 70.8 22.9 20.7
Insurance Expenses 70.1 66.8 23.5 22.1
Operating Income (Loss) 0.8 16.7 1.5 9.2
Income Tax Expense (Benefit) 0.1 (3.6) (0.2) (2.0)
Total Product Line Net Operating Income (Loss) $ 0.9 $ 13.1 $ 1.3 $ 7.2
Nine Months Ended September 30, 2021 Compared to the Same Period in 2020
Earned Premiums from accident and health insurance decreased by $6.8 million for
the nine months ended September 30, 2021 , compared to the same period in 2020.
Earned premiums decreased due primarily to lower volume on new business sales
and a reduction in the estimated return premium reserve for certain insurance
products subject to MLR in 2020. Policyholders' Benefits and Incurred Losses and
LAE on accident and health insurance were $74.2 million in 2021, compared to
$70.8 million in 2020, due primarily to higher frequency and severity of
claims.
Insurance Expenses increased by $3.3 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 Ended September 30, 2021 Compared to the Same Period in 2020
Earned Premiums from accident and health insurance decreased by $1.9 million for
the three months ended September 30, 2021 , compared to the same period in 2020.
Earned premiums decreased due primarily to lower volume on new business sales.
Policyholders' Benefit and Incurred Losses and LAE on accident and health
insurance were $22.9 million in 2021, compared to $20.7 million in 2020, due
primarily to higher frequency and severity of claims.
Insurance Expenses increased by $1.4 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.
57
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Life & Health Insurance (continued)
Property Insurance
Selected financial information for the property insurance product line follows.
Nine Months Ended Three Months Ended
Sep 30, Sep 30, Sep 30, Sep 30,
(Dollars in Millions) 2021 2020 2021 2020
Earned Premiums $ 46.8 $ 48.0 $ 15.6 $ 15.4
Net Investment Income (Loss) 1.7 0.3 0.5 0.1
Changes in Value of Alternative Energy Partnership
Investments (0.4) - (0.2) -
Total Revenues 48.1 48.3 15.9 15.5
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE 11.0 12.7 3.6 5.2
Catastrophe Losses and LAE 10.1 7.1 5.7 3.1
Prior Years:
Non-catastrophe Losses and LAE 1.2 0.3 0.4 0.4
Catastrophe Losses and LAE (0.1) 0.5 (0.4) 0.2
Total Incurred Losses and LAE 22.2 20.6 9.3 8.9
Insurance Expenses 24.2 18.4 7.9 5.7
Operating Income (Loss) 1.7 9.3 (1.3) 0.9
Income Tax Benefit (Expense) 0.2 (1.9) 0.5 (0.2)
Total Product Line Net Operating Income (Loss) $ 1.9
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio
23.4 % 26.5 % 23.1 % 33.8 % Current Year Catastrophe Losses and LAE Ratio 21.6 14.8 36.5 20.1 Prior Years Non-catastrophe Losses and LAE Ratio 2.6 0.6 2.6 2.6 Prior Years Catastrophe Losses and LAE Ratio (0.2) 1.0 (2.6) 1.3 Total Incurred Loss and LAE Ratio 47.4 % 42.9 % 59.6 % 57.8 % Nine Months EndedSeptember 30, 2021 Compared to the Same Period in 2020 Earned Premiums from property insurance decreased by$1.2 million for the nine months endedSeptember 30, 2021 , compared to the same period in 2020, due primarily to lower volume. Incurred losses and LAE on property insurance were$22.2 million , or 47.4% of earned premiums in 2021, compared to$20.6 million , or 42.9% of earned premiums in 2020. Underlying losses and LAE were$11.0 million , or 23.4% of earned premiums in 2021, compared to$12.7 million , or 26.5% of earned premiums in 2020, a decrease of 3.1 percentage points due primarily to lower claim frequency. Catastrophe losses and LAE (excluding loss reserve development) were$10.1 million in 2021, compared to$7.1 million in 2020. Catastrophe losses and LAE increased$3.0 million due primarily to higher frequency and severity of catastrophe claims. Adverse loss and LAE reserve development was$1.1 million in 2021, compared to adverse development of$0.8 million in 2020. Insurance expenses increased$5.8 million in 2021, compared to 2020. Three Months EndedSeptember 30, 2021 Compared to the Same Period in 2020 Earned Premiums from property insurance increased by$0.2 million for the three months endedSeptember 30, 2021 , compared to the same period in 2020, due primarily to higher volume. Incurred losses and LAE on property insurance were$9.3 million , or 59.6% of earned premiums, in 2021, compared to$8.9 million , or 57.8% of earned premiums in 2020. Underlying losses and LAE were$3.6 million , or 23.1% of earned premiums in 2021, compared to$5.2 million , or 33.8% of earned premiums in 2020, a decrease of 10.7 percentage points due primarily to lower claim frequency. Catastrophe losses and LAE (excluding loss reserve development) were$5.7 million in 2021, compared to$3.1 million in 2020. Catastrophe losses and LAE increased$2.6 million due primarily to higher severity of catastrophe events and higher frequency and severity of catastrophe claims. There 58 --------------------------------------------------------------------------------Life & Health Insurance (continued) was no loss and LAE reserve development in 2021, compared to adverse development of$0.6 million in 2020. Insurance expenses increased$2.2 million in 2021, compared to 2020. Investment Results Net Investment Income Net Investment Income for the nine and three months endedSeptember 30, 2021 and 2020 was: Nine Months Ended Three Months Ended Sep 30, Sep 30, Sep 30, Sep 30, (Dollars in Millions) 2021 2020 2021 2020 Investment Income: Interest on Fixed Income Securities$ 207.1 $ 218.0 $ 68.4 $ 72.7
Dividends on Equity Securities Excluding Alternative
Investments
9.8 10.7 2.9 2.8 Alternative Investments: Equity Method Limited Liability Investments 50.9 (2.7) 12.0 8.2 Limited Liability Investments Included in Equity Securities 29.3 7.3 9.5 2.4 Total Alternative Investments 80.2 4.6 21.5 10.6 Short-term Investments 0.6 4.2 0.2 2.3 Loans to Policyholders 16.3 16.6 5.4 5.5 Real Estate 7.1 7.1 2.3 2.3 Other 23.1 9.3 9.1 2.7 Total Investment Income 344.2 270.5 109.8 98.9 Investment Expenses: Real Estate 6.8 6.5 2.6 1.2 Other Investment Expenses 18.5 18.5 5.3 5.6 Total Investment Expenses 25.3 25.0 7.9 6.8 Net Investment Income$ 318.9 $ 245.5 $ 101.9 $ 92.1 Net Investment Income was$318.9 million and$245.5 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Net Investment Income increased by$73.4 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 inEquity 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 fromCompany-Owned Life Insurance due to higher average investment balance and rate. Net Investment Income was$101.9 million and$92.1 million for the three months endedSeptember 30, 2021 and 2020, respectively. Net Investment Income increased by$9.8 million in 2021 due primarily to higher volume of distributions received from appreciated Limited Liability Investments included inEquity Securities and higher valuation of Equity Method Limited Liability Investments, partially offset by lower yields from the Fixed Maturities portfolio reflecting lower reinvestment yields. Increase in Other Net Investment Income is driven by income fromCompany-Owned Life Insurance due to higher average investment balance and rate. Income and distributions on Alternative Investments can fluctuate significantly between periods as they are influenced by operating performance of the underlying investments, changes in market or economic conditions or the timing of asset sales. 59 -------------------------------------------------------------------------------- Investment Results (continued) Total Comprehensive Investment Gains (Losses) The components of Total Comprehensive Investment Gains (Losses) for the nine and three months endedSeptember 30, 2021 and 2020 were: Nine Months Ended Three Months Ended Sep 30, Sep 30, Sep 30, Sep 30, (Dollars in Millions) 2021 2020 2021 2020 Recognized in Condensed Consolidated Statements of Income: Income (Loss) from Change in Fair Value of Equity and Convertible Securities$ 92.4 $ (1.0) $ (0.6) $ 45.2 Gains on Sales 45.0 42.0 10.7 12.0 Losses on Sales (1.9) (3.8) (0.6) (2.0) Impairment Losses (7.8) (20.0) (0.6) (1.0)
Statements of Income
127.7 17.2 8.9 54.2 Recognized in Other Comprehensive Income (Loss) (255.9) 266.9 (79.3) 64.4 Total Comprehensive Investment Gains (Losses)$ (128.2) $ 284.1 $ (70.4) $ 118.6 Total Comprehensive Investment Gains (Losses) decreased by$412.3 million primarily due to decline in fixed maturities unrealized capital gains, partially offset by higher income from increased valuations of equity and convertible securities. Fixed maturities valuations decreased primarily due to wider credit spreads. Income (Loss) from Change in Fair Value ofEquity and Convertible Securities The components of Income (Loss) from Change in Fair Value ofEquity and Convertible Securities for the nine and three months endedSeptember 30, 2021 and 2020 were: Nine Months Ended Three Months Ended Sep 30, Sep 30, Sep 30, Sep 30, (Dollars in Millions) 2021 2020 2021 2020 Preferred Stocks$ 1.8 $ (3.1) $ 0.1 $ 2.3 Common Stocks 3.2 (1.5) (1.1) - Other Equity Interests: Exchange Traded Funds 50.1 6.1 (7.1) 35.5 Limited Liability Companies and Limited Partnerships 35.5 (1.9) 7.9 6.2 Total Other Equity Interests 85.6 4.2 0.8 41.7 Income (Loss) from Change in Fair Value of Equity Securities 90.6 (0.4) (0.2) 44.0
Income (Loss) from Change in Fair Value of
Securities
1.8 (0.6) (0.4) 1.2 Income (Loss) from Change in Fair Value of Equity and Convertible Securities$ 92.4 $ (1.0) $ (0.6) $ 45.2 60
-------------------------------------------------------------------------------- Investment Results (continued) Net Realized Gains on Sales of Investments The components of Net Realized Gains on Sales of Investments for the nine and three months endedSeptember 30, 2021 and 2020 were: Nine Months Ended Three Months Ended Sep 30, Sep 30, Sep 30, Sep 30, (Dollars in Millions) 2021 2020 2021 2020 Fixed Maturities: Gains on Sales$ 42.7 $ 38.7 $ 10.3 $ 11.9 Losses on Sales (1.7) (3.5) (0.4) (1.9) Equity Securities: Gains on Sales 1.8 1.5 0.1 0.1 Losses on Sales (0.2) (0.2) (0.2) - Equity Method Limited Liability Investments: Gains on Sales 0.4 - 0.4 - Losses on Sales - (0.1) - (0.1) Real Estate: Gains on Sales 0.1 1.8 (0.1) - Net Realized Gains on Sales of Investments$ 43.1 $ 38.2 $ 10.1 $ 10.0 Gross Gains on Sales$ 45.0 $ 42.0 $ 10.7 $ 12.0 Gross Losses on Sales (1.9) (3.8) (0.6) (2.0) Net Realized Gains on Sales of Investments$ 43.1 $ 38.2 $ 10.1 $ 10.0 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 nine and three months endedSeptember 30, 2021 and 2020 were: Nine Months Ended Three Months EndedSep 30, 2021 Sep 30, 2020 Sep 30, 2021 Sep 30, 2020 (Dollars in Millions) Amount Number of Issuers Amount Number of Issuers Amount Number of Issuers Amount Number of Issuers Fixed Maturities$ (3.3) 15$ (18.0) 23$ 0.5 -$ (1.0) 3Equity Securities (4.1) 13 (2.0) 4 (0.7) 2 - - Real Estate (0.4) 1 - - (0.4) 1 - - Impairment Losses$ (7.8) $ (20.0) $ (0.6) $ (1.0) Investment Quality and Concentrations The Company's fixed maturity investment portfolio is comprised primarily of high-grade corporate, municipal and agency bonds. AtSeptember 30, 2021 , 94.9% 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 61 -------------------------------------------------------------------------------- Investment Quality and Concentrations (continued) 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. The following table summarizes the credit quality of the Company's fixed maturity investment portfolio atSeptember 30, 2021 andDecember 31, 2020 : (Dollars in Millions) Sep 30, 2021 Dec 31, 2020 NAIC Rating Rating Fair Value Percentage Fair Value Percentage 1 AAA, AA, A$ 5,181.5 65.8 %$ 4,759.9 62.6 % 2 BBB 2,294.9 29.1 2,355.6 31.0 3-4 BB, B 295.0 3.7 353.1 4.6 5-6 CCC or Lower 113.7 1.4 137.3 1.8 Total Investments in Fixed Maturities$ 7,885.1 100.0 %$ 7,605.9
100.0 %
Gross unrealized losses on the Company's investments in below-investment-grade fixed maturities were$7.7 million and$23.7 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. The following table summarizes the fair value of the Company's investments in governmental fixed maturities atSeptember 30, 2021 andDecember 31, 2020 : Sep 30, 2021 Dec 31, 2020 Percentage Percentage of Total of Total (Dollars in Millions) Fair Value Investments Fair Value InvestmentsU.S. Government and Government Agencies and Authorities$ 502.6 4.8 %$ 585.3 5.6 %
States and Political Subdivisions:
Revenue Bonds 1,511.4 14.5 1,153.3 11.1 States 261.9 2.5 333.5 3.2 Political Subdivisions 144.0 1.4 102.6 1.0 Foreign Governments 5.7 0.1 5.2 -
Total Investments in Governmental Fixed Maturities
23.3 %$ 2,179.9 20.9 % The following table summarizes the fair value of the Company's investments in non-governmental fixed maturities by industry atSeptember 30, 2021 andDecember 31, 2020 . Sep 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$ 1,955.8 18.8 %$ 1,916.3 18.4 % Manufacturing 1,613.8 15.5 1,633.5 15.7 Transportation, Communication and Utilities 827.8 7.9 825.5 7.9 Services 622.1 6.0 581.3 5.6 Mining 269.8 2.6 285.7 2.7 Retail Trade 157.4 1.5 172.6 1.7 Construction 10.4 0.1 - - Wholesale Trade - - 0.5 - Other 2.4 - 10.5 0.1 Total Investments in Non-governmental Fixed Maturities$ 5,459.5 52.4 %$ 5,425.9 52.1 % 62
-------------------------------------------------------------------------------- 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 atSeptember 30, 2021 . (Dollars in Millions) Number of Issues Aggregate Fair Value Below$5 599 $ 1,283.7$5 -$10 189 1,329.0$10 -$20 134 1,798.2$20 -$30 29 698.5 Greater Than$30 10 350.1 Total 961 $ 5,459.5 The Company's short-term investments primarily consist of money market funds,U.S. treasury bills, overnight interest-bearing accounts and certificate of deposits. AtSeptember 30, 2021 , the Company had$243.9 million invested in money market funds which primarily invest inU.S. Treasury securities,$12.4 million invested inU.S. treasury bills and short-term bonds,$3.2 million invested in an overnight interest bearing account with one of the Company's custodial banks and$0.2 million invested in certificate of deposits. The following table summarizes the fair value of the Company's ten largest investment exposures in a single issuer, excluding investments inU.S. Government and Government Agencies and Authorities and Short-term Investments, atSeptember 30, 2021 : Percentage Fair of Total (Dollars in Millions) Value Investments Fixed Maturities: States including their Political Subdivisions: Texas$ 149.7 1.4 % California 106.7 1.0 New York 95.2 0.9 Georgia 92.4 0.9 Colorado 81.9 0.8 Louisiana 75.5 0.7 Florida 72.4 0.7 Pennsylvania 71.1 0.7
Vanguard Total World Stock ETF 215.0 2.1 iShares® Core MSCI Total International Stock ETF 86.1 0.8 Total$ 1,046.0 10.0 % 63
-------------------------------------------------------------------------------- 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 atSeptember 30, 2021 andDecember 31, 2020 is presented below. Unfunded Commitment Reported Value Sep 30, Sep 30, Dec 31, (Dollars in Millions) 2021 2021 2020 Reported as Equity Method Limited Liability Investments: Mezzanine Debt$ 48.3 $ 111.3 $ 102.5 Senior Debt 26.8 28.5 28.6 Distressed Debt - 22.3 14.5 Secondary Transactions 8.5 14.0 11.2 Leveraged Buyout 0.1 7.9 3.5 Growth Equity - 0.7 0.7 Real Estate - 30.0 29.9 Hedge Funds - 25.6 - Other - 14.8 13.1 Total Equity Method Limited Liability Investments 83.7 255.1 204.0 Alternative Energy Partnership Investments - 54.2 21.3 Reported as Other Equity Interests at Fair Value: Mezzanine Debt 58.3 133.2 118.3 Senior Debt 18.5 29.2 33.9 Distressed Debt 19.9 42.2 31.8 Secondary Transactions 6.8 4.0 4.2 Hedge Funds - 82.1 71.6 Leveraged Buyout 6.8 35.6 30.7 Other 0.7 2.6 1.5 Total Reported as Other Equity Interests at Fair Value 111.0 328.9 292.0
Reported as
Other 0.2 8.3 15.7 Total Reported as Equity Securities at Modified Cost 0.2 8.3 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.
64 --------------------------------------------------------------------------------
Expenses
Expenses for the nine and three months endedSeptember 30, 2021 and 2020 were: Nine Months Ended Three Months Ended Sep 30, Sep 30, Sep 30, Sep 30, (Dollars in Millions) 2021 2020 2021 2020 Insurance Expenses: Commissions$ 625.3 $ 562.5 $ 210.0 $ 195.5 General Expenses 252.0 224.3 85.1 74.6 Taxes, Licenses and Fees 79.1 71.2 26.5 23.3 Total Costs Incurred 956.4 858.0 321.6 293.4 Net Policy Acquisition Costs Amortized (Deferred) (87.3) (40.5) (23.8) (17.4) Amortization of Value of Business Acquired ("VOBA") 39.9 3.7 13.5 0.9 Insurance Expenses 909.0 821.2 311.3 276.9 Interest and Other Expenses: Interest Expense 33.0 24.7 10.7 8.3
Other Expenses:
Acquisition Related Transaction, Integration and Other Costs 34.7 43.3 8.0 14.4 Other 111.5 74.7 44.0 24.5 Other Expenses 146.2 118.0 52.0 38.9 Interest and Other Expenses 179.2 142.7 62.7 47.2 Total Expenses$ 1,088.2 $ 963.9 $ 374.0 $ 324.1 Insurance Expenses Insurance Expenses were$909.0 million for the nine months endedSeptember 30, 2021 , compared to$821.2 million for the same period in 2020. Insurance Expenses increased by$87.8 million in 2021 due primarily to growth in business and increased amortization of VOBA with the acquisition of AAC. Insurance Expenses were$311.3 million for the three months endedSeptember 30, 2021 , compared to$276.9 million for the same period in 2020. Insurance Expenses increased by$34.4 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$179.2 million for the nine months endedSeptember 30, 2021 , compared to$142.7 million for the same period in 2020. Interest expense increased by$8.3 million in 2021 due primarily to the addition of the 2030 Senior Notes inSeptember 2020 . Other expenses increased by$28.2 million in 2021. Interest and Other Expenses was$62.7 million for the three months endedSeptember 30, 2021 , compared to$47.2 million for the same period in 2020. Interest expense increased by$2.4 million in 2021 due primarily to the addition of the 2030 Senior Notes inSeptember 2020 . Other expenses increased by$13.1 million in 2021. Income Taxes The federal corporate statutory income tax rate was 21% for the nine months endedSeptember 30, 2021 andSeptember 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 onCompany-Owned Life Insurance , (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$16.4 million for the nine months endedSeptember 30, 2021 , compared to$14.3 million for the same period in 2020. Tax-exempt investment income and dividends received deductions collectively were$5.0 million for the three months endedSeptember 30, 2021 , compared to$4.7 million for the same period in 2020. 65 -------------------------------------------------------------------------------- Income Taxes (continued) The nontaxable increase in cash surrender value onCompany-Owned Life Insurance was$18.2 million for the nine months endedSeptember 30, 2021 , compared to$9.1 million for the same period in 2020. The nontaxable increase in cash surrender value onCompany-Owned Life Insurance was$7.2 million for the three months endedSeptember 30, 2021 , compared to$3.3 million for the same period in 2020. The Company realized net investment tax credits of$58.0 million and$25.7 million for the nine months ended and three months endedSeptember 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$1.6 million lower than the amount that would be deductible under the Internal Revenue Code (the "IRC") for the nine months endedSeptember 30, 2021 , compared to$10.6 million lower for the same period in 2020. The amount of expense recognized for long-term equity-based compensation expense under GAAP was$0.2 million higher than the amount that would be deductible under the IRC for the three months endedSeptember 30, 2021 , compared to$3.5 million lower for the same period in 2020. The amount of nondeductible executive compensation was$10.5 million for the nine months endedSeptember 30, 2021 , compared to$9.8 million for the same period in 2020. The amount of nondeductible executive compensation was$3.5 million for the three months endedSeptember 30, 2021 , compared to$2.7 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 nine months endedSeptember 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 atSeptember 30, 2021 andDecember 31, 2020 was: Sep 30, Dec 31, (Dollars in Millions) 2021 2020 Term Loan due July 5, 2023 $ -$ 49.9
5.000% Senior Notes due
4.350% Senior Notes due
448.9 448.8
2.400% Senior Notes due
Total Long-term Debt Outstanding$ 1,122.1 $ 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 . 66 -------------------------------------------------------------------------------- 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 ofSeptember 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 atSeptember 30, 2021 andDecember 31, 2020 , respectively. The carrying value of FHLB ofDallas common stock was$3.4 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. The carrying value of FHLB ofSan Francisco common stock was$1.7 million atSeptember 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 nine months of 2021, United Insurance received advances of$296.9 million from the FHLB ofChicago and made repayments of$326.0 million . United Insurance had outstanding advances from the FHLB ofChicago totaling$378.9 million atSeptember 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$547.8 million atSeptember 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$161.7 million in 2020 and 2021, respectively, so that, as ofSeptember 30, 2021 , the remaining share repurchase authorization was$171.6 million under the repurchase program. The amount and timing of any future share 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. 67 -------------------------------------------------------------------------------- Liquidity and Capital Resources (continued) During the nine months endedSeptember 30, 2021 and 2020, Kemper repurchased and retired approximately 2,085,000 and 1,617,000 shares, respectively, of its common stock under its share repurchase authorization for an aggregate cost of$161.7 million and$110.4 million and an average cost per share of$77.58 and$68.29 , respectively. During the three months endedSeptember 30, 2021 Kemper repurchased and retired approximately 40,000 shares of its common stock under its share repurchase authorization for an aggregate cost of$3.0 million and an average cost per share of$74.79 . Kemper did not repurchase any shares for the three months endedSeptember 30, 2020 . Dividends to Shareholders Kemper paid a quarterly dividend to shareholders of$0.31 per common share in the third quarter of 2021. Cash dividends paid were$60.8 million for the nine months endedSeptember 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 insurance subsidiaries collectively paid$319.0 million in dividends to Kemper during the first nine months of 2021. Kemper estimates that its direct insurance subsidiaries would be able to pay approximately$101.3 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$330.6 million atSeptember 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$307.6 million for the nine months endedSeptember 30, 2021 , compared to$251.3 million for the same period in 2020.Net Cash Used by Financing Activities was$294.9 million for the nine months endedSeptember 30, 2021 , compared to net cash provided of$433.4 million for the same period in 2020. Repayments of long-term debt used$50.0 million of cash for the nine months endedSeptember 30, 2021 . Policyholder Obligations used$30.0 million of cash for the nine months endedSeptember 30, 2021 , compared to net cash provided of$199.4 million for the same period of 2020. Cash of$161.7 million for the nine months endedSeptember 30, 2021 was used to repurchase common stock, compared to$110.4 million used for the same period of 2020. 68 -------------------------------------------------------------------------------- Liquidity and Capital Resources (continued) Kemper used$60.8 million of cash to pay dividends for the nine months endedSeptember 30, 2021 , compared to$59.3 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 third 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$99.0 million for the nine months endedSeptember 30, 2021 , compared to$469.3 million for the same period in 2020. Short-term investing activities provided$715.1 million of cash for the nine months endedSeptember 30, 2021 , compared to cash used of$147.9 million for the same period in 2020. Fixed Maturities investing activities used cash of$306.6 million for the nine months endedSeptember 30, 2021 , compared to$302.7 million for the same period in 2020. Investing activities associated withEquity Securities used cash of$18.7 million for the nine months endedSeptember 30, 2021 , compared to net cash provided of$120.7 million for the same period in 2020. The Company used$100.0 million of cash to purchase company-owned life insurance during each of the nine months endedSeptember 30, 2021 and 2020. Net cash used for the acquisition and development of software and long-lived assets was$43.9 million for the nine months endedSeptember 30, 2021 , compared to$46.2 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. 69
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Arthur J. Gallagher & Co. Announces Third Quarter 2021 Financial Results
SELECTIVE INSURANCE GROUP INC – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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