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KEMPER CORP – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Summary of Results
Net Loss was$94.8 million ($(1.49) per unrestricted common share) for the three months endedMarch 31, 2022 , compared to Net Income of$123.2 million ($1.88 per unrestricted common share) for the same period in 2021. Beginning inMarch 2020 , the global pandemic associated with COVID-19 and related economic conditions began to impact the Company's results of operations. The numbers referenced in the following paragraphs are estimates. The actual impacts could ultimately differ from the stated estimates, although the Company believes any difference would likely not be material. For the three months endedMarch 31, 2022 , the Company estimates that its net results were negatively impacted by$120 million related to the effects of the COVID-19 pandemic and related economic conditions. The impact to net results was primarily related to underwriting losses in the P&C business attributable to rising loss costs fueled by higher inflation, as well as pandemic-related auto industry shortages of supplies such as chips, high demand for used cars, and higher labor costs. Additionally, the Life & Health insurance segment continued to experience excess pandemic-related mortality. For the three months endedMarch 31, 2021 , the Company estimated that its net results were negatively impacted by$5 million related to the effects of the COVID-19 pandemic and related economic conditions. The decrease to net income was primarily attributed to excess mortality in theLife & Health Insurance segment, partially offset by favorable underwriting results driven by lower frequency in the auto business of the P&C segments as a significant reduction in miles driven occurred. For further discussion regarding the potential impacts of COVID-19 and related economic conditions on the Company, see "Caution Regarding Forward-Looking Statements" beginning on page 1 and Item 1A., Risk Factors, of Part I of the Company's 2021 Annual Report on Form 10-K.
A reconciliation of Net Income (Loss) to Adjusted Consolidated Net Operating
Income (Loss) (a non-GAAP financial measure) for the three months ended
Three Months Ended
Mar 31, Mar 31, Increase
(Dollars in Millions and Net of Income Taxes) 2022 2021 (Decrease)
Net Income (Loss) $ (94.8) $ 123.2 $ (218.0)
Less:
Income (Loss) from Change in Fair Value of
Securities
(22.3) 41.2 (63.5) Net Realized Gains on Sales of Investments 1.2 10.9 (9.7) Impairment Losses (7.0) (3.2) (3.8) Acquisition Related Transaction, Integration and Other Costs (3.7) (12.9) 9.2 Loss from Early Extinguishment of Debt (2.9) -$ (2.9) Adjusted Consolidated Net Operating Income (Loss) $
(60.1)
Components of Adjusted Consolidated Net Operating Income (Loss):
Segment Net Operating Income (Loss):
$ (44.7) $ 80.1 $ (124.8) Preferred Property & Casualty Insurance (6.1) 9.6 (15.7) Life & Health Insurance 3.1 7.3 (4.2) Total Segment Net Operating Income (Loss) (47.7) 97.0 (144.7)
Corporate and Other Net Operating Income (Loss) From:
Other (12.4) (9.8) (2.6) Corporate and Other Net Operating Income (Loss) (12.4) (9.8) (2.6) Adjusted Consolidated Net Operating Income (Loss)$ (60.1) $ 87.2 $ (147.3) 35
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Summary of Results (Continued)
Net Income
Net Income decreased by$218.0 million for the three months endedMarch 31, 2022 , compared to the same period in 2021, due primarily to lower Adjusted Consolidated Net Operating Income and loss from Change in Fair Value ofEquity and Convertible Securities . Adjusted Consolidated Net Operating Income decreased by$147.3 million for the three months endedMarch 31, 2022 , compared to the same period in 2021, due primarily to lower Specialty Property & Casualty Segment Insurance Net Operating Income, Preferred Property & Casualty Segment Insurance Net Operating Income, Life & Health Insurance Segment Net Operating Income, and Corporate and Other Net Operating Income. See MD&A, "Specialty Property & Casualty Insurance ", "Preferred Property & Casualty Insurance " and "Life & Health Insurance ," for discussion of each respective segment's results. Corporate and Other Net Operating Income decreased due primarily to increased interest expense resulting from the issuance of the 2032 Senior Notes. The Company's investment results deteriorated for the three months endedMarch 31, 2022 , compared to the same period in 2021, due primarily to a$63.5 million after-tax decrease in income from the change in fair value of equity and convertible securities, a$9.7 million after-tax decrease in net realized gains on sales of investments, and a$3.8 million after-tax increase in impairment losses. See MD&A, "Investment Results," for additional discussion.
Revenues
Earned Premiums were$1,338.6 million for the three months endedMarch 31, 2022 , compared to$1,200.8 million for the same period in 2021, an increase of$137.8 million . Earned Premiums in theSpecialty Property & Casualty Insurance segment increased by$144.0 million for the three months endedMarch 31, 2022 , compared to the same period in 2021. Earned Premiums in thePreferred Property & Casualty Insurance segments decreased by$6.6 million for the three months endedMarch 31, 2022 , compared to the same period in 2021. See MD&A, "Specialty Property & Casualty Insurance " and "Preferred Property & Casualty Insurance ", for discussion of the changes in each segment's earned premiums. Net Investment Income decreased by$3.1 million for the three months endedMarch 31, 2022 , compared to the same period in 2021, due primarily to lower return from Alternative Investments, lower yields on fixed income securities, partially offset by higher levels of fixed maturities and higher levels and rate onCompany-Owned Life Insurance . Loss from the Change in Value of Alternative Energy Partnership Investments was$16.7 million for the three months endedMarch 31, 2022 , compared to$15.4 million for the same period 2021. Tax benefits related to the Alternative Energy Partnership Investments were$7.0 million and$28.6 million for the three months endedMarch 31, 2022 and 2021, respectively. This resulted in a net loss of$9.7 million and net income of$13.2 million attributable to Alternative Energy Partnership Investments for the three months endedMarch 31, 2022 and 2021, respectively.
Other Income was
compared to
Net Realized Gains on Sales of Investments were
months ended
2021.
Impairment Losses were
compared to
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.
36
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Non-GAAP Financial Measures (Continued)
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 of
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 three months endedMarch 31, 2022 or 2021. 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. 37 --------------------------------------------------------------------------------
Selected financial information for the
segment follows.
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2022 2021
Net Premiums Written $ 1,023.7 $ 972.0
Earned Premiums $ 1,021.6 $ 877.6
Net Investment Income 34.9 35.0
Change in Value of Alternative Energy Partnership Investments (8.4) (7.3)
Other Income 1.7 0.9
Total Revenues 1,049.8 906.2
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE 911.7 650.0
Catastrophe Losses and LAE 2.1 1.7
Prior Years:
Non-catastrophe Losses and LAE (3.8) (1.4)
Catastrophe Losses and LAE 0.7 0.4
Total Incurred Losses and LAE 910.7 650.7
Insurance Expenses 199.3 170.3
Operating Income (Loss) (60.2) 85.2
Income Tax Benefit (Expense) 15.5 (5.1)
Segment Net Operating Income (Loss) $ (44.7) $ 80.1
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio 89.2 % 74.1 %
Current Year Catastrophe Losses and LAE Ratio 0.2 0.2
Prior Years Non-catastrophe Losses and LAE Ratio (0.4) (0.2)
Prior Years Catastrophe Losses and LAE Ratio 0.1 -
Total Incurred Loss and LAE Ratio 89.1 74.1
Insurance Expense Ratio 19.5 19.4
Combined Ratio 108.6 % 93.5 %
Underlying Combined Ratio
Current Year Non-catastrophe Losses and LAE Ratio 89.2 % 74.1 %
Insurance Expense Ratio 19.5 19.4
Underlying Combined Ratio 108.7 % 93.5 %
Non-GAAP Measure Reconciliation
Combined Ratio 108.6 % 93.5 %
Less:
Current Year Catastrophe Losses and LAE Ratio 0.2 0.2
Prior Years Non-catastrophe Losses and LAE Ratio (0.4) (0.2)
Prior Years Catastrophe Losses and LAE Ratio 0.1 -
Underlying Combined Ratio 108.7 % 93.5 %
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Insurance Reserves
Mar 31, Dec 31,
(Dollars in Millions) 2022 2021
Insurance Reserves:
Personal Automobile $ 1,952.3 $ 1,985.8
Commercial Automobile 356.5 333.9
Insurance Reserves $ 2,308.8 $ 2,319.7
Insurance Reserves:
Loss and Allocated LAE Reserves:
Case and Allocated LAE $ 1,166.0 $ 1,157.9
Incurred But Not Reported 934.0 953.0
Total Loss and LAE Reserves 2,100.0 2,110.9
Unallocated LAE Reserves 208.8 208.8
Insurance Reserves $ 2,308.8 $ 2,319.7
See MD&A, "Critical Accounting Estimates," of the 2021 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
Three Months Ended
The Specialty Property & Casualty Insurance segment reported a Segment Net Operating Loss of$44.7 million for the three months endedMarch 31, 2022 , compared to Segment Net Operating Income of$80.1 million for the same period in 2021. Segment Net Operating Income decreased by$124.8 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. 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$144.0 million for the three months endedMarch 31, 2022 , compared to the same period in 2021, driven by the acquisition of AAC and higher average earned premium per exposure resulting from rate increases associated with higher loss trends. Policies-in-force were lower in Private Passenger Auto, excluding AAC, as a result of ongoing profit improvement actions. Net Investment Income in theSpecialty Property & Casualty Insurance segment decreased by$0.1 million for the three months endedMarch 31, 2022 , compared to the same period in 2021, due primarily to lower return from Alternative Investments, partially offset by higher levels of investments and rate onCompany-Owned Life Insurance , and higher levels of investments in fixed income securities. Loss related to Change in Value of Alternative Energy Partnership Investments was$8.4 million for the three months endedMarch 31, 2022 , compared to$7.3 million for the same period in 2021. Tax benefits related to the Alternative Energy Partnership Investments were$3.6 million and$13.6 million for the three months endedMarch 31, 2022 and 2021, respectively. This resulted in a net loss of$4.8 million and net income of$6.3 million attributable to Alternative Energy Partnership Investments for the three months endedMarch 31, 2022 and 2021, respectively. Underlying losses and LAE as a percentage of earned premiums were 89.2% for the three months endedMarch 31, 2022 , a deterioration of 15.1 percentage points, compared to the same period in 2021, due primarily to higher claim frequency and severity trends. Frequency trends increased as a result of driving activity returning to near pre-pandemic levels. Severity trends increased due to rising inflation and supply chain constraints. Underlying losses and LAE exclude the impact of catastrophes and loss and LAE reserve development. Favorable loss and LAE reserve development (including catastrophe reserve development) was$3.1 million for the three months endedMarch 31, 2022 , compared to$1.0 million for the same period in 39
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2021. Catastrophe losses and LAE (excluding reserve development) were$2.1 million for the three months endedMarch 31, 2022 , compared to$1.7 million for the same period in 2021, a deterioration of$0.4 million . Insurance Expenses were$199.3 million , or 19.5% of earned premiums, for the three months endedMarch 31, 2022 , a deterioration of 0.1 percentage points compared to the same period in 2021.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.
Selected financial information for the personal automobile insurance product
line follows.
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2022 2021
Net Premiums Written $ 884.8 $ 861.5
Earned Premiums $ 901.7 $ 785.4
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE $ 827.7 $ 586.4
Catastrophe Losses and LAE 2.0 1.6
Prior Years:
Non-catastrophe Losses and LAE (9.0) (4.4)
Catastrophe Losses and LAE 0.7 0.4
Total Incurred Losses and LAE
Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 91.8 % 74.7 % Current Year Catastrophe Losses and LAE Ratio 0.2 0.2 Prior Years Non-catastrophe Losses and LAE Ratio (1.0) (0.6) Prior Years Catastrophe Losses and LAE Ratio 0.1 0.1 Total Incurred Loss and LAE Ratio
91.1 % 74.4 %
Three Months Ended
Earned Premiums from personal automobile insurance increased by$116.3 million for the three months endedMarch 31, 2022 , compared to the same period in 2021, due primarily to the acquisition of AAC and higher average earned premium per exposure resulting from rate increases associated with higher loss costs, partially offset by a decrease in new business driven by targeted underwriting actions focused on improving profitability. Incurred losses and LAE were$821.4 million , or 91.1% of earned premiums for the three months endedMarch 31, 2022 , compared to$584.0 million , or 74.4% of earned premiums, for the same period in 2021. 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. Underlying losses and LAE as a percentage of related earned premiums were 91.8% for the three months endedMarch 31, 2022 , compared to 74.7% for the same period in 2021, a deterioration of 17.1 points due to higher claim frequency and severity trends. Frequency trends increased as a result of driving activity returning to near pre-pandemic levels. Severity trends increased due to rising inflation and supply chain constraints. Favorable loss and LAE reserve development was$8.3 million for the three months endedMarch 31, 2022 , compared to$4.0 million for the same period in 2021. Catastrophe losses and LAE (excluding reserve development) were$2.0 million for the three months endedMarch 31, 2022 , compared to$1.6 million for the same period in 2021. 40 --------------------------------------------------------------------------------
Selected financial information for the commercial automobile insurance product
line follows.
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2022 2021
Net Premiums Written $ 138.9 $ 110.5
Earned Premiums $ 119.9 $ 92.2
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE $ 84.0 $ 63.6
Catastrophe Losses and LAE 0.1 0.1
Prior Years:
Non-catastrophe Losses and LAE 5.2 3.0
Catastrophe Losses and LAE - -
Total Incurred Losses and LAE $ 89.3 $ 66.7
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio 70.1 % 68.9 %
Current Year Catastrophe Losses and LAE Ratio 0.1 0.1
Prior Years Non-catastrophe Losses and LAE Ratio 4.3 3.3
Prior Years Catastrophe Losses and LAE Ratio - -
Total Incurred Loss and LAE Ratio 74.5 % 72.3 %
Three Months Ended
Earned Premiums from commercial automobile insurance increased by$27.7 million for the three months endedMarch 31, 2022 , compared to the same period in 2021, due primarily to higher volume and higher average earned premium per exposure. Incurred losses and LAE were$89.3 million , or 74.5% of earned premiums in 2022, compared to$66.7 million , or 72.3% of earned premiums in 2021. Incurred losses and LAE as a percentage of earned premiums increased due primarily to a deterioration in underlying losses and LAE as a percentage of earned premiums as well as adverse loss and LAE reserve development. Underlying losses and LAE as a percentage of earned premiums were 70.1% in 2022, compared to 68.9% in 2021, a deterioration of 1.2 percentage points due primarily to higher claim severity trends. Severity trends increased due to rising inflation and supply chain constraints. Adverse loss and LAE reserve development was$5.2 million for the three months endedMarch 31, 2022 , compared to$3.0 million for the same period in 2021. 41 --------------------------------------------------------------------------------
Selected financial information for the
segment follows.
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2022 2021
Net Premiums Written $ 137.4 $ 154.4
Earned Premiums $ 155.6 $ 162.2
Net Investment Income 12.5 15.9
Changes in Value of Alternative Energy Partnership Investments (3.9) (4.1)
Other Income - -
Total Revenues 164.2 174.0
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE 112.2 96.2
Catastrophe Losses and LAE 11.4 24.0
Prior Years:
Non-catastrophe Losses and LAE 2.1 0.1
Catastrophe Losses and LAE (3.2) (0.3)
Total Incurred Losses and LAE 122.5 120.0
Insurance Expenses 51.2 51.0
Operating Income (Loss) (9.5) 3.0
Income Tax Benefit (Expense) 3.4 6.6
Segment Net Operating Income (Loss)
Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 72.2 % 59.3 % Current Year Catastrophe Losses and LAE Ratio 7.3 14.8 Prior Years Non-catastrophe Losses and LAE Ratio 1.3 0.1 Prior Years Catastrophe Losses and LAE Ratio (2.1) (0.2) Total Incurred Loss and LAE Ratio 78.7 74.0 Insurance Expense Ratio 32.9 31.4 Combined Ratio 111.6 % 105.4 % Underlying Combined Ratio Current Year Non-catastrophe Losses and LAE Ratio 72.2 % 59.3 % Insurance Expense Ratio 32.9 31.4 Underlying Combined Ratio 105.1 % 90.7 % Non-GAAP Measure Reconciliation Combined Ratio 111.6 % 105.4 %
Less:
Current Year Catastrophe Losses and LAE Ratio 7.3 14.8
Prior Years Non-catastrophe Losses and LAE Ratio 1.3 0.1
Prior Years Catastrophe Losses and LAE Ratio (2.1) (0.2)
Underlying Combined Ratio 105.1 % 90.7 %
42
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CATASTROPHE FREQUENCY AND SEVERITY
Three Months Ended
Mar 31, 2022 Mar 31, 2021
Number of Losses and Number of Losses and
(Dollars in Millions) Events LAE Events LAE
Range of Losses and LAE Per Event:
Below $5 11 $ 11.4 11 $ 8.9
$5 - $10 - - - -
$10 - $15 - - - -
$15 - $20 - - 1 15.1
$20 - $25 - - - -
Greater Than $25 - - - -
Total 11 $ 11.4 12 $ 24.0
INSURANCE RESERVES
Mar 31, Dec 31,
(Dollars in Millions) 2022 2021
Insurance Reserves:
Personal Automobile $ 307.9 $ 308.6
Homeowners 93.1 95.4
Other 30.6 29.2
Insurance Reserves $ 431.6 $ 433.2
Insurance Reserves:
Loss and Allocated LAE Reserves:
Case and Allocated LAE $ 271.1 $ 272.5
Incurred But Not Reported 131.8 131.9
Total Loss and LAE Reserves 402.9 404.4
Unallocated LAE Reserves 28.7 28.8
Insurance Reserves $ 431.6 $ 433.2
See MD&A, "Critical Accounting Estimates," of the 2021 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
Three Months Ended
The Preferred Property & Casualty Insurance segment reported a Segment Net Operating Loss of$6.1 million for the three months endedMarch 31, 2022 , compared to Segment Net Operating Income of$9.6 million for the same period in 2021. Segment Net Operating Loss decreased by$15.7 million due primarily to higher underlying losses and LAE as a percentage of earned premiums, partially offset by lower catastrophe losses and LAE. Earned Premiums in thePreferred Property & Casualty Insurance segment decreased by$6.6 million for the three months endedMarch 31, 2022 , compared to the same period in 2021, due primarily to lower personal automobile insurance volumes as a result of ongoing profit improvement actions. 43 --------------------------------------------------------------------------------
Net Investment Income in thePreferred Property & Casualty Insurance segment decreased by$3.4 million for the three months endedMarch 31, 2022 , compared to the same period in 2021, due primarily to lower return from Alternative Investments, partially offset by higher levels of investments and rate onCompany-Owned Life Insurance , and higher levels of investments in fixed income securities. Loss related to Changes in Value of Alternative Energy Partnership Investments was$3.9 million for the three months endedMarch 31, 2022 , compared to$4.1 million for the same period in 2021. Tax benefits related to the Alternative Energy Partnership Investments were$1.6 million and$7.6 million for the three months endedMarch 31, 2022 and 2021, respectively. This resulted in a net loss of$2.3 million and net income of$3.5 million attributable to Alternative Energy Partnership Investments for the three months endedMarch 31, 2022 and 2021, respectively. Underlying losses and LAE as a percentage of earned premiums were 72.2% and 59.3% for the three months endedMarch 31, 2022 and 2021, respectively. Underlying losses and LAE as a percentage of earned premiums increased primarily due to severity trends caused by ongoing supply chain issues and rising inflation. Catastrophe losses and LAE (excluding reserve development) were$11.4 million in 2022, compared to$24.0 million in 2021, a decreased of$12.6 million . Catastrophe losses and LAE (excluding reserve development) decreased due primarily to a decrease in severity of catastrophic events in 2022, compared to 2021. There was zero catastrophic event above$5 million in 2022, compared to one catastrophic events above$5 million in 2021. Favorable loss and LAE reserve development (including catastrophe reserve development) was$1.1 million in 2022, compared to$0.2 million in 2021.
Insurance expenses were
deterioration of 1.5% percentage points compared to 2021.
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.
Selected financial information for the personal automobile insurance product
line follows.
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2022 2021
Net Premiums Written $ 84.2 $ 100.4
Earned Premiums $ 96.0 $ 103.0
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE$ 80.5
Catastrophe Losses and LAE 0.5
0.6
Non-catastrophe Losses and LAE 1.5
1.2
Catastrophe Losses and LAE 0.1
0.1
Total Incurred Losses and LAE$ 82.6
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio 83.8 %
65.8 %
Current Year Catastrophe Losses and LAE Ratio 0.5
0.6
Prior Years Non -catastrophe Losses and LAE Ratio 1.6
1.2
Prior Years Catastrophe Losses and LAE Ratio 0.1
0.1
Total Incurred Loss and LAE Ratio 86.0 %
67.7 %
44
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Three Months Ended
Earned Premiums in preferred personal automobile insurance decreased by$7.0 million for the three months endedMarch 31, 2022 , compared to the same period in 2021, due primarily to lower volume as a result of ongoing profit improvement actions. Incurred losses and LAE were$82.6 million , or 86.0% of earned premiums, for the three months endedMarch 31, 2022 , compared to$69.7 million , or 67.7% of earned premiums, for the same period in 2021. Incurred losses and LAE as a percentage of earned premiums increased due primarily to a deterioration in the underlying loss and LAE ratio. Underlying losses and LAE as a percentage of earned premiums were 83.8% for the three months endedMarch 31, 2022 , compared to 65.8% for the same period in 2021, a deterioration of 18.0 percentage points primarily due to higher claim frequency and severity trends. Frequency trends increased as a result of driving activity returning to pre-pandemic levels. Severity trends increased due to rising inflation and supply chain constraints. Adverse loss and LAE reserve development (including catastrophe loss reserve development) was$1.6 million for the three months endedMarch 31, 2022 , compared to$1.3 million for the same period in 2021. Catastrophe losses and LAE (excluding reserve development) were$0.5 million for the three months endedMarch 31, 2022 , compared to$0.6 million for the same period in 2021.Homeowners Insurance Selected financial information for the homeowners insurance product line follows. Three Months Ended Mar 31, Mar 31, (Dollars in Millions) 2022 2021 Net Premiums Written$ 45.5 $ 46.1 Earned Premiums$ 51.3 $ 50.8 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE$ 27.5 $ 24.2 Catastrophe Losses and LAE 10.8 22.0 Prior Years: Non-catastrophe Losses and LAE (1.6) (2.5) Catastrophe Losses and LAE (2.8) (0.1) Total Incurred Losses and LAE$ 33.9 $ 43.6 Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 53.6 % 47.6 % Current Year Catastrophe Losses and LAE Ratio 21.1 43.3 Prior Years Non-catastrophe Losses and LAE Ratio (3.1) (4.9) Prior Years Catastrophe Losses and LAE Ratio (5.5) (0.2) Total Incurred Loss and LAE Ratio 66.1 % 85.8 %
Three Months Ended
Earned Premiums in homeowners insurance increased by$0.5 million for the three months endedMarch 31, 2022 , compared to the same period in 2021. Incurred losses and LAE were$33.9 million , or 66.1% of earned premiums, for the three months endedMarch 31, 2022 , compared to$43.6 million , or 85.8% of earned premiums, for the same period in 2021. Incurred losses and LAE as a percentage of earned premiums decreased due primarily to lower incurred catastrophe losses (excluding loss reserve development) and increased favorable prior year 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 53.6% for the three months endedMarch 31, 2022 , compared to 47.6% for the same period in 2021, an increase of 6.0 percentage points. Catastrophe losses and LAE (excluding reserve development) were$10.8 million for the three months endedMarch 31, 2022 , compared to$22.0 million for the same period in 2021. There were zero catastrophic event above$5 million for the three months endedMarch 31, 2022 , compared to one catastrophic event above$5 million for the same period in 2021. Favorable 45 --------------------------------------------------------------------------------
loss and LAE reserve development (including catastrophe loss reserve
development) was
compared to
Other
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.
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2022 2021
Net Premiums Written $ 7.7 $ 7.9
Earned Premiums $ 8.3 $ 8.4
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE $ 4.2 $ 4.2
Catastrophe Losses and LAE 0.1 1.4
Prior Years:
Non-catastrophe Losses and LAE 2.2 1.4
Catastrophe Losses and LAE (0.5) (0.3)
Total Incurred Losses and LAE $ 6.0 $ 6.7
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio 50.6 % 50.0 %
Current Year Catastrophe Losses and LAE Ratio 1.2 16.7
Prior Years Non-catastrophe Losses and LAE Ratio 26.5 16.7
Prior Years Catastrophe Losses and LAE Ratio (6.0) (3.6)
Total Incurred Loss and LAE Ratio 72.3 % 79.8 %
Three Months Ended
Earned Premiums in other personal insurance decreased by$0.1 million for the three months endedMarch 31, 2022 , compared to the same period in 2021. Incurred losses and LAE were$6.0 million , or 72.3% of earned premiums, for the three months endedMarch 31, 2022 , compared to$6.7 million , or 79.8% of earned premiums, for the same period in 2021. Underlying losses and LAE as a percentage of earned premiums were 50.6% for the three months endedMarch 31, 2022 , compared to 50.0% for the same period in 2021, a deterioration of 0.6 percentage points. Catastrophe losses and LAE (excluding loss reserve development) were$0.1 million for the three months endedMarch 31, 2022 , compared to$1.4 million for the same period in 2021. Adverse loss and LAE reserve development (including catastrophe losses development) for the three months endedMarch 31, 2022 was$1.7 million , compared to$1.1 million for the same period in 2021. 46 --------------------------------------------------------------------------------
Selected financial information for theLife & Health Insurance segment follows. Three Months Ended Mar 31, Mar 31, (Dollars in Millions) 2022 2021 Earned Premiums$ 161.4 $ 161.0 Net Investment Income 49.4 51.1 Changes in Value of Alternative Energy Partnership Investments (4.4) (4.0) Other Income - 0.1 Total Revenues 206.4 208.2 Policyholders' Benefits and Incurred Losses and LAE 120.1 118.7 Insurance Expenses 85.1 90.3 Operating Income (Loss) 1.2 (0.8) Income Tax Benefit (Expense) 1.9 8.1 Segment Net Operating Income (Loss)$ 3.1 $ 7.3 INSURANCE RESERVES Mar 31, Dec 31, (Dollars in Millions) 2022 2021 Insurance Reserves: Future Policyholder Benefits$ 3,467.5 $ 3,454.1 Incurred Losses and LAE Reserves: Life 63.6 60.7 Accident and Health 25.2 26.1 Property 3.1 3.6 Total Incurred Losses and LAE Reserves 91.9 90.4 Insurance Reserves$ 3,559.4 $ 3,544.5
Use of Death Verification Databases
In the third quarter of 2016, the Company's Life & Health segment voluntarily began implementing a comprehensive process under which it cross-references its life insurance policies against the DeathMaster File maintained by theSocial 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 endedDecember 31, 2016 included a pre-tax charge of$77.8 million to recognize the initial impact of using death verification databases in the Company's operations, including to determine its IBNR liability for unpaid claims and claims adjustment expenses for life insurance products. Subsequently, the Company reduced its estimate of the initial impact of using death verification databases by$30.3 million , of which$9.3 million was recognized during 2020 and$21.0 million was recognized during 2019. Overall
Three Months Ended
Earned Premiums in theLife & Health Insurance segment increased by$0.4 million for the three months endedMarch 31, 2022 , compared to the same period in 2021. This is due primarily to higher volume on life insurance products partially offset by lower volume on accident and health insurance products and property insurance products. Net Investment Income decreased by$1.7 million for the three months endedMarch 31, 2022 , compared to the same period in 2021, due primarily to lower return from Alternative Investments, lower yields on fixed income securities, partially offset by higher levels of investments and rate onCompany-Owned Life Insurance . 47
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Loss related to Changes in Value of Alternative Energy Partnership Investments was$4.4 million for the three months endedMarch 31, 2022 , compared to$4.0 million for the same period in 2021. Tax benefits related to the Alternative Energy Partnership Investments were$1.8 million and$7.4 million for the three months endedMarch 31, 2022 and 2021, respectively. This resulted in a net loss of$2.6 million and net income of$3.4 million attributable to Alternative Energy Partnership Investments for the three months endedMarch 31, 2022 and 2021, respectively. Policyholders' Benefits and Incurred Losses and LAE increased by$1.4 million for the three months endedMarch 31, 2022 , compared to the same period in 2021, due primarily to higher persistency and mortality for life insurance related to COVID-19, partially offset by lower frequency of accident and health insurance claims. Insurance Expenses in theLife & Health Insurance segment decreased by$5.2 million for the three months endedMarch 31, 2022 , compared to the same period in 2021, due primarily to lower levels of initiative spend on investments made to modernize and enhance the capabilities of the business. Segment Net Operating Income in theLife & Health Insurance segment was$3.1 million for the three months endedMarch 31, 2022 , compared to$7.3 million in 2021.
federal statutory income tax rate due primarily to investment tax credits,
tax-exempt investment income and dividends received deductions.
Life Insurance
Selected financial information for the life insurance product line follows.
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2022 2021
Earned Premiums $ 101.3 $ 98.1
Net Investment Income 47.9 49.6
Changes in Value of Alternative Energy Partnership Investments (4.0) (3.8)
Total Revenues 145.2 143.9
Policyholders' Benefits and Incurred Losses and LAE 90.6 87.9
Insurance Expenses 57.4 58.0
Operating Income (Loss) (2.8) (2.0)
Income Tax Benefit (Expense) 2.6 8.0
Total Product Line Net Operating Income (Loss) $ (0.2) $ 6.0
Three Months Ended
Earned Premiums from life insurance increased by$3.2 million for the three months endedMarch 31, 2022 , compared to the same period in 2021, due primarily to increased new business and higher persistency. Policyholders' Benefits and Incurred Losses and LAE on life insurance were$90.6 million for the three months endedMarch 31, 2022 , compared to$87.9 million for the same period in 2021, an increase of$2.7 million due primarily to higher persistency and mortality related to COVID-19.
Insurance Expenses decreased by
levels of initiative spend on investments made to modernize and enhance the
capabilities of the business.
48 --------------------------------------------------------------------------------
Selected financial information for the accident and health insurance product
line follows.
Three Months
Ended
Mar 31, Mar 31,
(Dollars in Millions) 2022 2021
Earned Premiums $ 45.8 $ 47.4
Net Investment Income 0.7 1.0
Changes in Value of Alternative Energy Partnership Investments (0.1) (0.1)
Other Income - 0.1
Total Revenues 46.4 48.4
Policyholders' Benefits and Incurred Losses and LAE 23.5 24.5
Insurance Expenses 20.8 24.4
Operating Income (Loss) 2.1 (0.5)
Income Tax Benefit (Expense) (0.4) 0.2
Total Product Line Net Operating Income (Loss) $ 1.7 $ (0.3)
Three Months Ended
Earned Premiums from accident and health insurance decreased by$1.6 million for the three months endedMarch 31, 2022 , compared to the same period in 2021. This is due primarily to lower volume on new business sales. Policyholders' Benefits and Incurred Losses and LAE on accident and health insurance were$23.5 million for the three months endedMarch 31, 2022 , compared to$24.5 million for the same period in 2021. This is due primarily to lower frequency of claims.
Insurance Expenses decreased by
levels of initiative spend on investments made to modernize and enhance the
capabilities of the business.
49 --------------------------------------------------------------------------------
Selected financial information for the property insurance product line follows.
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2022 2021
Earned Premiums $ 14.3 $ 15.5
Net Investment Income (Loss) 0.8 0.5
Changes in Value of Alternative Energy Partnership Investments (0.3) (0.1)
Total Revenues 14.8 15.9
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE 4.1 3.2
Catastrophe Losses and LAE 0.4 1.9
Prior Years:
Non-catastrophe Losses and LAE 0.6 0.7
Catastrophe Losses and LAE 0.9 0.5
Total Incurred Losses and LAE 6.0 6.3
Insurance Expenses 6.9 7.9
Operating Income (Loss) 1.9 1.7
Income Tax Benefit (Expense) (0.3) (0.1)
Total Product Line Net Operating Income (Loss) $ 1.6 $ 1.6
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio 28.7 % 20.6 %
Current Year Catastrophe Losses and LAE Ratio 2.8 12.3
Prior Years Non-catastrophe Losses and LAE Ratio 4.2 4.5
Prior Years Catastrophe Losses and LAE Ratio 6.3 3.2
Total Incurred Loss and LAE Ratio 42.0 % 40.6 %
Three Months Ended
Earned Premiums from property insurance decreased by$1.2 million for the three months endedMarch 31, 2022 , compared to the same period in 2021, due primarily to a lower volume of property insurance products. Incurred losses and LAE on property insurance were$6.0 million , or 42.0% of earned premiums, for the three months endedMarch 31, 2022 , compared to$6.3 million , or 40.6% of earned premiums for the same period in 2021. Underlying losses and LAE were$4.1 million , or 28.7% of earned premiums for the three months endedMarch 31, 2022 , compared to$3.2 million , or 20.6% of earned premiums for the same period in 2021, an increase of 8.1 percentage points due primarily to higher claim frequency. Catastrophe losses and LAE (excluding loss reserve development) were$0.4 million for the three months endedMarch 31, 2022 , compared to$1.9 million for the same period in 2021. Catastrophe losses and LAE decreased$1.5 million due primarily to lower severity of catastrophe claims. Adverse loss and LAE reserve development was$1.5 million for the three months endedMarch 31, 2022 , compared to an adverse development of$1.2 million in the same period in 2021. Insurance expenses decreased$1.0 million for the three months endedMarch 31, 2022 , compared to the same period in 2021 due primarily to lower levels of initiative spend on investments made to modernize and enhance the capabilities of the business. 50
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Investment Results
Net Investment Income
Net Investment Income for the three months endedMarch 31, 2022 and 2021 was: Three Months Ended Mar 31, Mar 31, (Dollars in Millions) 2022 2021 Investment Income: Interest on Fixed Income Securities$ 68.7 $ 69.0 Dividends on Equity Securities Excluding Alternative Investments 1.5 2.1 Alternative Investments: Equity Method Limited Liability Investments 13.3 22.5 Limited Liability Investments Included in Equity Securities 7.6 4.5 Total Alternative Investments 20.9 27.0 Short-term Investments 0.1 1.2 Loans to Policyholders 5.5 5.5 Real Estate 2.2 2.4 Other 10.0 4.7 Total Investment Income 108.9 111.9 Investment Expenses: Real Estate 2.5 2.1 Other Investment Expenses 6.4 6.7 Total Investment Expenses 8.9 8.8 Net Investment Income$ 100.0 $ 103.1 Net Investment Income was$100.0 million and$103.1 million for the three months endedMarch 31, 2022 and 2021, respectively. Net Investment Income decreased by$3.1 million in 2022 due primarily to lower valuations ofEquity Method Limited Liability Investments partially offset by higher volume of distributions received from appreciated Limited Liability Investments included inEquity Securities . 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.
Total Comprehensive Investment Gains (Losses)
The components of Total Comprehensive Investment Gains (Losses) for the three
months ended
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2022 2021
Recognized in Condensed Consolidated Statements of Income:
Income (Loss) from Change in Fair Value of Equity and Convertible
Securities $ (28.2) $ 52.2
Gains on Sales 2.4 14.9
Losses on Sales (0.9) (1.1)
Impairment Losses (8.9) (4.0)
Income
(35.6) 62.0 Recognized in Other Comprehensive Income (Loss) (651.9) (366.1) Total Comprehensive Investment Gains (Losses)$ (687.5) $ (304.1) 51
--------------------------------------------------------------------------------
Investment Results (Continued)
Total Comprehensive Investment Gains (Losses) decreased by$383.4 million primarily due to a decrease in the fair value of the Company's fixed income bond portfolio and a loss from the change in fair value of the Company's fair value method equity and convertible securities.
Income (Loss) from Change in Fair Value of
The components of Income (Loss) from Change in Fair Value ofEquity and Convertible Securities for the three months endedMarch 31, 2022 and 2021 were: Three Months Ended Mar 31, Mar 31, (Dollars in Millions) 2022 2021 Preferred Stocks$ (2.4) $ 0.5 Common Stocks 0.4 0.4 Other Equity Interests: Exchange Traded Funds (30.9) 25.9 Limited Liability Companies and Limited Partnerships 4.5 23.2 Total Other Equity Interests (26.4) 49.1 Income (Loss) from Change in Fair Value of Equity Securities (28.4) 50.0
Income (Loss) from Change in Fair Value of
0.2 2.2
Income (Loss) from Change in Fair Value of
Securities
$ (28.2) $ 52.2
Net Realized Gains on Sales of Investments
The components of Net Realized Gains on Sales of Investments for the three
months ended
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2022 2021
Fixed Maturities:
Gains on Sales $ 0.4 $ 13.2
Losses on Sales (0.8) (1.1)
Equity Securities:
Gains on Sales 2.0 1.7
Losses on Sales (0.1) -
Net Realized Gains on Sales of Investments $ 1.5 $ 13.8
Gross Gains on Sales $ 2.4 $ 14.9
Gross Losses on Sales (0.9) (1.1)
Net Realized Gains on Sales of Investments $ 1.5 $ 13.8
52
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Investment Results (Continued)
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 three months endedMarch 31, 2022 and 2021 were: Three Months Ended Mar 31, 2022 Mar 31, 2021 (Dollars in Millions) Amount Number of Issuers Amount Number of Issuers Fixed Maturities$ (8.9) 17$ (3.2) 6 Equity Securities - - (0.8) 1 Impairment Losses$ (8.9) $ (4.0)
Investment Quality and Concentrations
The Company's fixed maturity investment portfolio is comprised primarily of high-grade corporate, municipal and agency bonds. AtMarch 31, 2022 , 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 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 at
(Dollars in Millions) Mar 31, 2022 Dec 31, 2021
NAIC
Rating Rating Fair Value Percentage Fair Value Percentage
1 AAA, AA, A $ 5,302.9 68.1 % $ 5,351.6 67.0 %
2 BBB 2,087.4 26.8 2,215.1 27.7
3-4 BB, B 307.0 4.0 331.0 4.2
5-6 CCC or Lower 86.6 1.1 89.2 1.1
Total Investments in Fixed Maturities $ 7,783.9 100.0 % $ 7,986.9
100.0 %
Gross unrealized losses on the Company's investments in below-investment-grade
fixed maturities were
53
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Investment Quality and Concentrations (Continued)
The following table summarizes the fair value of the Company's investments in
governmental fixed maturities at
Mar 31, 2022 Dec 31, 2021
Percentage Percentage
of Total of Total
(Dollars in Millions) Fair Value Investments Fair Value Investments
U.S. Government and Government Agencies and
Authorities $ 630.4 6.3 % $ 637.4 6.1 %
States and Political Subdivisions:
Revenue Bonds 1,421.4 14.3 1,516.1 14.6 States 219.3 2.2 235.8 2.3 Political Subdivisions 129.5 1.3 138.2 1.3 Foreign Governments 5.0 0.1 5.5 0.1
Total Investments in Governmental Fixed Maturities
24.2 %$ 2,533.0 24.4 % The following table summarizes the fair value of the Company's investments in non-governmental fixed maturities by industry atMarch 31, 2022 andDecember 31, 2021 . Mar 31, 2022 Dec 31, 2021 Percentage Percentage of Total of Total (Dollars in Millions) Fair Value Investments Fair Value Investments Finance, Insurance and Real Estate$ 2,135.8 21.4 %$ 1,996.7 19.2 % Manufacturing 1,445.9 14.5 1,571.0 15.1 Transportation, Communication and Utilities 769.1 7.7 815.8 7.9 Services 597.7 6.0 617.5 5.9 Mining 239.0 2.4 254.3 2.4 Retail Trade 162.4 1.6 171.4 1.7 Construction 20.4 0.2 13.1 0.1 Other 7.9 0.1 14.1 0.1 Wholesale Trade 0.2 - - - Total Investments in Non-governmental Fixed Maturities$ 5,378.4 53.9 %$ 5,453.9 52.4 % The following table summarizes the fair value of the Company's investments in non-governmental fixed maturities by range of amount invested atMarch 31, 2022 . (Dollars in Millions) Number of Issues Aggregate Fair Value Below$5 669 $ 1,405.8$5 -$10 211 1,549.2$10 -$20 116 1,541.9$20 -$30 30 730.8 Greater Than$30 4 150.6 Total 1,030 $ 5,378.3 The Company's short-term investments primarily consist of money market funds and short term bonds. AtMarch 31, 2022 , the Company had$243.5 million invested in money market funds which primarily invest inU.S. Treasury securities and$0.4 million invested inU.S. treasury bills and short-term bonds. 54 --------------------------------------------------------------------------------
Investment Quality and Concentrations (Continued)
The following table summarizes the fair value of the Company's ten largest investment exposures in a single issuer, excluding investments inU.S. Government and Government Agencies and Authorities and Short-term Investments, atMarch 31, 2022 : Percentage Fair of Total (Dollars in Millions) Value Investments Fixed Maturities: States including their Political Subdivisions: Texas$ 136.6 1.4 % California 103.7 1.0 New York 91.4 0.9 Georgia 89.8 0.9 Michigan 76.6 0.8 Florida 70.8 0.7 Louisiana 69.7 0.7 Colorado 65.2 0.7
Vanguard Total World Stock ETF 112.1 1.1 iShares® Core MSCI Total International Stock ETF 75.6 0.8 Total$ 891.5 9.0 % 55
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Investments in Limited Liability Companies and Limited Partnerships
The 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 atMarch 31, 2022 andDecember 31, 2021 is presented below. Unfunded Commitment Reported Value Mar 31, Mar 31, Dec 31, (Dollars in Millions) 2022 2022 2021 Reported as Equity Method Limited Liability Investments: Mezzanine Debt$ 40.2 $ 121.0 $ 120.0 Senior Debt 49.0 25.8 27.5 Distressed Debt - 18.9 21.7 Secondary Transactions 2.1 12.9 11.7 Leveraged Buyout 0.9 9.2 8.7 Growth Equity - 1.3 0.7 Real Estate - 29.7 29.9 Hedge Fund - 0.5 8.7 Other - 10.7 13.0 Total Equity Method Limited Liability Investments 92.2 230.0 241.9 Alternative Energy Partnership Investments - 22.4 39.6 Reported as Other Equity Interests at Fair Value: Mezzanine Debt 52.5 131.8 129.3 Senior Debt 15.7 30.2 29.9 Distressed Debt 18.6 45.2 44.9 Secondary Transactions 5.6 3.7 4.0 Hedge Funds - 68.1 82.7 Leveraged Buyout 8.3 34.8 32.2 Growth Equity 0.5 4.0 2.0 Other - - - Total Reported as Other Equity Interests at Fair Value 101.2 317.8 325.0
Reported as
Other - 7.6 7.7 Total Reported as Equity Securities at Modified Cost - 7.6 7.7
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. The Company expects that the proceeds from distributions
from these investments will be the primary source of funding of such
commitments.
56
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Expenses
Expenses for the three months ended
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2022 2021
Insurance Expenses:
Commissions $ 191.9 $ 195.2
General Expenses 87.1 84.6
Taxes, Licenses and Fees 25.4 25.4
Total Costs Incurred 304.4 305.2
Net Policy Acquisition Costs Amortized (Deferred) (2.5) (22.4)
Amortization of Value of Business Acquired ("VOBA") 2.1 0.9
Insurance Expenses 304.0 283.7
Loss from Early Extinguishment of Debt 3.7 -
Interest and Other Expenses:
Interest Expense 12.7 11.1
Other Expenses:
Acquisition Related Transaction, Integration and Other Costs 4.7 16.3
Other 36.7 29.8
Other Expenses 41.4 46.1
Interest and Other Expenses 54.1 57.2
Total Expenses $ 361.8 $ 340.9
Insurance Expenses
Insurance Expenses increased by $20.3 million for the three months ended
March 31, 2022 , compared to the same period in 2021, due primarily to a lower
net deferral of policy acquisition costs as premium growth slowed due to ongoing
profit improvement actions.
Loss from Early Extinguishment of Debt
Loss from Early Extinguishment of Debt increased by
months ended
redemption of the 2022 Senior Notes.
Interest and Other Expenses
Interest expense increased by$1.6 million for the three months endedMarch 31, 2022 , compared to the same period in 2021, due primarily to the addition of the 2032 Senior Notes and the 2062 Junior Debentures during the three months endedMarch 31, 2022 . Other expenses decreased by$4.7 million for the three months endedMarch 31, 2022 , compared to the same period in 2021, due primarily to a decrease in acquisition-related integration expenses, partially offset by an increase in miscellaneous corporate expenses.
Income Taxes
The federal corporate statutory income tax rate was 21% for the three months endedMarch 31, 2022 andMarch 31, 2021 . 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$6.3 million for the three months endedMarch 31, 2022 , compared to$5.0 million for the same period in 2021.The nontaxable increase in cash surrender value onCompany-Owned Life Insurance was$8.3 million for the three months endedMarch 31, 2022 , compared to$4.6 million for the 57 --------------------------------------------------------------------------------
Income Taxes (Continued)
same period in 2021. The Company realized net investment tax credits of$3.5 million for the three months endedMarch 31, 2022 , compared to$25.4 million for the same period in 2021. The amount of expense recognized for long-term equity-based compensation expense under GAAP was$3.6 million higher than the amount that would be deductible under the IRC for the three months endedMarch 31, 2022 , compared to$1.5 million lower for the same period in 2021. The amount of nondeductible executive compensation was$3.1 million for the three months endedMarch 31, 2022 , compared to$3.5 million for the same period in 2021.
Recently Issued Accounting Pronouncements
The Company has adopted all recently issued accounting pronouncements with
effective dates prior to
accounting pronouncements during the three months ended
a material impact on the Company's Condensed Consolidated Financial Statements.
Liquidity and Capital Resources
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 atMarch 31, 2022 andDecember 31, 2021 was: Mar 31, Dec 31, (Dollars in Millions) 2022 2021 Senior Notes: 5.000% Senior Notes due September 19, 2022 $ -$ 276.7 4.350% Senior Notes due February 15, 2025 449.1 449.0 2.400% Senior Notes due September 30, 2030 396.3 396.2 3.800% Senior Notes due February 23, 2032 395.1 - 5.875% Fixed-Rate Reset Junior Subordinated Debentures Due 2062 144.7 - Total Long-term Debt Outstanding
See Note 13, "Debt," to the Consolidated Financial Statements for more
information regarding the Company's long-term debt.
Amended and Extended Credit Agreement
OnMarch 15, 2022 , the Company entered into an amended and extended credit agreement. The amended and extended credit agreement increased the borrowing capacity of the existing unsecured credit agreement to$600.0 million and extended the maturity date toMarch 15, 2027 . Furthermore, the amended and extended credit agreement provides for an accordion feature whereby the Company can increase the revolving credit borrowing capacity by$200.0 million to a total of$800.0 million . There were no outstanding borrowings under the credit agreement at eitherMarch 31, 2022 orDecember 31, 2021 .
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$14.7 million and$11.8 million atMarch 31, 2022 andDecember 31, 2021 , respectively. The carrying value of FHLB ofDallas common stock was$3.4 million atMarch 31, 2022 andDecember 31, 2021 , respectively. The carrying value of FHLB ofSan Francisco common stock was$1.7 million atMarch 31, 2022 andDecember 31, 2021 , 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. 58 --------------------------------------------------------------------------------
Liquidity and Capital Resources (Continued)
During the first three months of 2022, United Insurance received advances of$208.4 million from the FHLB ofChicago and made repayments of$57.1 million . United Insurance had outstanding advances from the FHLB ofChicago totaling$553.1 million atMarch 31, 2022 . 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$622.5 million atMarch 31, 2022 . 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's common stock, in addition to$133.3 million remaining under theAugust 6, 2014 authorization, bringing the remaining share repurchase authorization to approximately$333.3 million . As ofMarch 31, 2022 the remaining share repurchase authorization under the repurchase program was$171.6 million . 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. During the three months endedMarch 31, 2022 the Company did not repurchase any shares of its common stock. During the three months endedMarch 31, 2021 the Company repurchased approximately 590,000 shares of its common stock under its share repurchase authorization for an aggregate cost of$47.1 million and an average cost per share of$79.36 .
Dividends to Shareholders
Kemper paid a quarterly dividend to shareholders of$0.31 per common share in the first quarter of 2022. Dividends and dividend equivalents paid were$19.8 million for the three months endedMarch 31, 2022 .
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 did not pay any dividends to Kemper during the first three months of 2022. Kemper estimates that its direct insurance subsidiaries would be able to pay approximately$128.6 million in additional dividends to Kemper during the remainder of 2022 without prior regulatory approval. Sources and Uses of Funds
Kemper and its direct non-insurance subsidiaries directly held cash and
investments totaling
million
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 59 --------------------------------------------------------------------------------
Liquidity and Capital Resources (Continued)
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. Information about the Company's cash flows for three months endedMarch 31, 2022 and 2021 is presented below. DOLLARS IN MILLIONS March 31, 2022 March 31, 2021 Net Cash Provided by (Used in) Operating Activities$ (18.2) $ 140.6 Net Cash Provided by (Used in) Investing Activities (225.1) 311.7 Net Cash Provided by (Used in) Financing Activities 392.4 (111.0) 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.
Cash Provided by (Used in) Operating Activities
Net cash used by Operating Activities was$18.2 million for the three months endedMarch 31, 2022 , compared to generating$140.6 million of net cash for the same period in 2021, a decrease of$158.8 million . Cash from operating activities decreased primarily due to higher paid losses within the P&C business in 2022 due to an increase in frequency and rising loss costs from increased severity trends caused by rising inflation and supply chain constraints. This is partially offset by higher premium collections due to the acquisition of AAC in the second quarter of 2021.
Cash Provided by (Used in) Investing Activities
Net cash used by Investing Activities for the three months endedMarch 31, 2022 was$225.1 million , compared to cash provided of$311.7 million for the same period in 2021, a decrease of$536.8 million . This was primarily due to the sale of short-term investments in 2021 to fund the cash acquisition of AAC. The Company also had increased net purchases of fixed maturities, mostly funded by higher proceeds from sales, calls and maturities of the existing fixed maturity portfolio and sales of equity securities.
Cash Provided by (Used in) Financing Activities
Net cash provided by Financing Activities for the three months endedMarch 31, 2022 was$392.4 million , compared to cash used of$111.0 million for the same period in 2021, an increase of$503.4 million . This was primarily due to the issuance of the 2032 Senior Notes and 2062 Junior Debentures, partially of offset by the redemption of the 2022 Senior Notes. Additionally, the Company increased its net advances under the FHLB spread-lending program due to a more attractive interest rate environment in 2022.
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 2021
Annual Report. There have been no material changes to the information disclosed
in the 2021 Annual Report with respect to these critical accounting estimates
and the Company's critical accounting policies.
60
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