Newswires
KEMPER CORP – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Summary of Results
Net Loss was
months ended
unrestricted common share) for the same period in 2021.
Net Loss was
months ended
unrestricted common share) for the same period in 2021.
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, 2022 and 2021 is presented below. Nine Months Ended Three Months Ended Sep 30, Sep 30, Increase Sep 30, Sep 30, Increase (Dollars in Millions and Net of Income Taxes) 2022 2021 (Decrease) 2022 2021 (Decrease) Net Income (Loss) (245.7) (14.7) (231.0) (76.2) (75.3) (0.9) Less: Income (Loss) from Change in Fair Value of Equity and Convertible Securities (63.1) 73.0 (136.1) (8.8) (0.5)
(8.3)
Net Realized Investment Gains (Losses) 0.3 34.0 (33.7) (9.6) 7.9 (17.5) Impairment Losses (17.5) (6.2) (11.3) (6.6) (0.5) (6.1) Acquisition and Disposition Related Transaction, Integration, Restructuring and Other Costs (32.2) (27.5) (4.7) (20.7) (6.4)
(14.3)
Loss from Early Extinguishment of Debt (2.9) - (2.9) - -
-
Adjusted Consolidated Net Operating Income (Loss)$ (130.3) $
(88.0)
45.3
Components of Adjusted Consolidated Net Operating Income (Loss): Segment Net Operating Income (Loss): Specialty Property & Casualty Insurance$ (112.3) $
(70.9)
30.6
Preferred Property & Casualty Insurance (25.0) (5.1) (19.9) (2.1) (6.4)
4.3
Life & Health Insurance 33.4 23.1 10.3 12.6 2.8
9.8
Total Segment Net Operating Income (Loss) (103.9) (52.9) (51.0) (18.2) (62.9)
44.7
Corporate and Other Net Operating Income (Loss) From: Other (26.4) (35.1) 8.7 (12.3) (12.9) 0.6 Corporate and Other Net Operating Income (Loss) (26.4) (35.1) 8.7 (12.3) (12.9)
0.6
Adjusted Consolidated Net Operating Income (Loss)$ (130.3) $ (88.0) $ (42.3) $ (30.5) $ (75.8) $ 45.3 Net Income (Loss) Net Loss increased by$231.0 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021, due primarily to lower Adjusted Consolidated Net Operating Income (Loss) and loss from Change in Fair Value of Equity and Convertible securities. Adjusted Consolidated Net Operating Loss increased by$42.3 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021, due primarily to higher Specialty Property & Casualty Segment Insurance Net Operating Loss and Preferred Property & Casualty Segment Insurance Net Operating Loss, partially offset by higher Life & Health Insurance Segment Net Operating Income and lower Corporate and Other Net Operating Loss. 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 increased due primarily to decreased general expenses. The Company's investment results deteriorated for the nine months endedSeptember 30, 2022 , compared to the same period in 2021, due primarily to a$136.1 million after-tax decrease in income from the change in fair value of equity and convertible securities, a$33.7 million after-tax decrease in net realized investment gains, and a$11.3 million after-tax increase in impairment losses. See MD&A, "Investment Results," for additional discussion. 44 --------------------------------------------------------------------------------
Summary of Results (Continued)
Net Loss increased by$0.9 million for the three months endedSeptember 30, 2022 , compared to the same period in 2021, due primarily to increases in Net Realized Investment Losses, Impairment Losses and Loss from Change in Fair Value of Equity and Convertible securities, partially offset by a lower Adjusted Consolidated Net Operating Loss. Adjusted Consolidated Net Operating Loss decreased by$45.3 million for the three months endedSeptember 30, 2022 , compared to the same period in 2021, due primarily to lower Specialty Property & Casualty Segment Insurance Net Operating Loss, higherLife & Health Insurance Segment Net Operating Income, and lower Preferred Property & Casualty Segment Insurance Net Operating Loss.
Revenues
Earned Premiums were$3,999.3 million for the nine months endedSeptember 30, 2022 , compared to$3,894.6 million for the same period in 2021, an increase of$104.7 million . Earned Premiums in theSpecialty Property & Casualty Insurance segment increased by$148.6 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021. Earned Premiums in thePreferred Property & Casualty Insurance segments decreased by$34.3 million for the nine months endedSeptember 30, 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. Earned Premiums were$1,307.0 million for the three months endedSeptember 30, 2022 , compared to$1,356.1 million for the same period in 2021, a decrease of$49.1 million . Earned Premiums in theSpecialty Property & Casualty Insurance segment decreased by$28.8 million for the three months endedSeptember 30, 2022 , compared to the same period in 2021. Earned Premiums in thePreferred Property & Casualty Insurance segments decreased by$14.4 million for the three months endedSeptember 30, 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$2.6 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021, due primarily to lower valuations on Equity Method Limited Liability Investments, lower rate onFixed Income Securities , and lower balances inEquity Securities , partially offset by higher levels of investments inFixed Income Securities andCompany-Owned Life Insurance and higher volume of distributions received from appreciated Limited Liability Investments included inEquity Securities . Net Investment Income decreased by$4.1 million for the three months endedSeptember 30, 2022 , compared to the same period in 2021, due primarily to lower valuations on Equity Method Limited Liability Investments, partially offset by higher levels of investments inFixed Income Securities andCompany-Owned Life Insurance . Loss from the Change in Value of Alternative Energy Partnership Investments was$21.2 million for the nine months endedSeptember 30, 2022 compared to$46.9 million for the same period in 2021. Tax benefits related to the Alternative Energy Partnership Investments were$8.0 million and$67.9 million for the nine months endedSeptember 30, 2022 and 2021 respectively. This resulted in net loss of$13.2 million and net income of$21.0 million attributable to Alternative Energy Partnership Investments for the nine months endedSeptember 30, 2022 and 2021, respectively. Income from the Change in Value of Alternative Energy Partnership Investments was$0.4 million for the three months endedSeptember 30, 2022 , compared to a loss of$23.8 million for the same period 2021. Tax expense related to the Alternative Energy Partnership Investments was$0.1 million for the three months endedSeptember 30, 2022 , compared to tax benefits of$30.6 million for the same period in 2021. This resulted in a net income of$0.3 million and$6.8 million attributable to Alternative Energy Partnership Investments for the three months endedSeptember 30, 2022 and 2021, respectively.
Other Income was
compared to
Other Income was
compared to
Net Realized Investment Gains were
Realized Investment Gains were
Impairment Losses were$22.1 million for the nine months endedSeptember 30, 2022 , compared to$7.8 million for the same period in 2021. Impairment Losses were$8.3 million for the three months endedSeptember 30, 2022 , compared to$0.6 million for the same period in 2021. 45 --------------------------------------------------------------------------------
Summary of Results (Continued)
See MD&A, "Investment Results," under the sub-captions "Net Realized Investment Gains (Losses)" 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 of
Securities
(ii) Net Realized Investment Gains (Losses);
(iii) Impairment Losses;
(iv) Acquisition and Disposition Related Transaction, Integration, Restructuring
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 months endedSeptember 30, 2022 or 2021. The Company believes that Adjusted Consolidated Net Operating Income (Loss) 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 Investment Gains (Losses) 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 and Disposition Related Transaction, Integration, Restructuring and Other 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 46 --------------------------------------------------------------------------------
Non-GAAP Financial Measures (Continued)
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.
47
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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) 2022 2021 2022 2021 Net Premiums Written$ 3,012.1 $ 3,078.3 $ 968.5 $ 1,024.3 Earned Premiums$ 3,064.8 $ 2,916.2 $ 999.5 $ 1,028.3 Net Investment Income 102.8 114.7 33.9 37.0 Change in Value ofAlternative Energy Partnership Investments (10.6) (22.3) 0.3 (11.3) Other Income 5.0 3.1 2.3 1.2 Total Revenues 3,162.0 3,011.7 1,036.0 1,055.2 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE 2,709.9 2,451.8 868.0 924.4 Catastrophe Losses and LAE 23.1 13.2 14.8 3.4 Prior Years: Non-catastrophe Losses and LAE (24.8) 105.0 (6.6) 25.1 Catastrophe Losses and LAE 0.7 0.3 0.2 (0.1) Total Incurred Losses and LAE 2,708.9 2,570.3 876.4 952.8 Insurance Expenses 603.5 570.1 198.8 194.2 Other Expenses - - - - Operating Income (Loss) (150.4) (128.7) (39.2) (91.8) Income Tax Benefit (Expense) 38.1 57.8 10.5 32.5 Segment Net Operating Income (Loss)$ (112.3)
Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 88.4 % 84.0 % 86.9 % 90.0 % Current Year Catastrophe Losses and LAE Ratio 0.8 0.5 1.5 0.3 Prior Years Non-catastrophe Losses and LAE Ratio (0.8) 3.6 (0.7) 2.4 Prior Years Catastrophe Losses and LAE Ratio - - - - Total Incurred Loss and LAE Ratio 88.4 88.1 87.7 92.7 Insurance Expense Ratio 19.7 19.5 19.9 18.9 Combined Ratio 108.1 % 107.6 % 107.6 % 111.6 % Underlying Combined Ratio Current Year Non-catastrophe Losses and LAE Ratio 88.4 % 84.0 % 86.9 % 90.0 % Insurance Expense Ratio 19.7 19.5 19.9 18.9 Underlying Combined Ratio 108.1 % 103.5 % 106.8 % 108.9 % Non-GAAP Measure Reconciliation Combined Ratio 108.1 % 107.6 % 107.6 % 111.6 %
Less:
Current Year Catastrophe Losses and LAE Ratio 0.8 0.5 1.5 0.3
Prior Years Non-catastrophe Losses and LAE Ratio (0.8) 3.6 (0.7) 2.4
Prior Years Catastrophe Losses and LAE Ratio - - - -
Underlying Combined Ratio 108.1 % 103.5 % 106.8 % 108.9 %
48
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Insurance Reserves
Sep 30, Dec 31,
(Dollars in Millions) 2022 2021
Insurance Reserves:
Personal Automobile $ 1,857.0 $ 1,985.8
Commercial Automobile 417.8 333.9
Insurance Reserves $ 2,274.8 $ 2,319.7
Insurance Reserves:
Loss and Allocated LAE Reserves:
Case and Allocated LAE $ 1,110.7 $ 1,157.9
Incurred But Not Reported 968.2 953.0
Total Loss and LAE Reserves 2,078.9 2,110.9
Unallocated LAE Reserves 195.9 208.8
Insurance Reserves $ 2,274.8 $ 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
Nine Months Ended
The Specialty Property & Casualty Insurance segment reported a Segment Net Operating Loss of$112.3 million for the nine months endedSeptember 30, 2022 , compared to Segment Net Operating Loss of$70.9 million for the same period in 2021. Segment Net Operating Loss increased by$41.4 million due primarily to an increase in underlying losses and LAE as a percentage of earned premiums related to higher 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$148.6 million for the nine months endedSeptember 30, 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 as a result of ongoing profit improvement actions. Net Investment Income in theSpecialty Property & Casualty Insurance segment decreased by$11.9 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021, due primarily to lower returns from Alternative Investments and lower levels ofEquity Securities , partially offset by higher yields and levels ofCompany-Owned Life Insurance and investments in fixed income securities. Loss related to Changes in Value of Alternative Energy Partnership Investments was$10.6 million for the nine months endedSeptember 30, 2022 , compared to$22.3 million for the same period in 2021. Tax benefits related to the Alternative Energy Partnership Investments were$4.0 million and$32.2 million for the nine months endedSeptember 30, 2022 and 2021. This resulted in net loss of$6.6 million and net income of$9.9 million attributable to Alternative Energy Partnership Investments for the nine months endedSeptember 30, 2022 and 2021, respectively. Underlying losses and LAE as a percentage of earned premiums were 88.4% for the nine months endedSeptember 30, 2022 , a deterioration of 4.4 percentage points, compared to the same period in 2021, due primarily to higher severity trends. 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$24.1 million for the nine months endedSeptember 30, 2022 , compared to adverse reserve development of$105.3 million for the same period in 2021. 49
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Catastrophe losses and LAE (excluding reserve development) were$23.1 million in 2022, compared to$13.2 million for the same period in 2021, a deterioration of$9.9 million . Insurance Expenses were$603.5 million , or 19.7% of earned premiums, for the nine months endedSeptember 30, 2022 , a deterioration of 0.2 percentage point 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.
Three Months Ended
The Specialty Property & Casualty Insurance segment reported a Segment Net Operating Loss of$28.7 million for the three months endedSeptember 30, 2022 , compared to a Segment Net Operating Loss of$59.3 million for the same period in 2021. Segment Net Operating Loss decreased by$30.6 million due primarily to a decrease in underlying losses and LAE as a percentage of earned premiums and favorable prior year loss and LAE reserve development as a percentage of earned premiums compared to adverse prior year loss and LAE reserve development for the same period in 2021. Earned Premiums in theSpecialty Property & Casualty Insurance segment decreased by$28.8 million for the three months endedSeptember 30, 2022 , compared to the same period in 2021, driven by lower policies-in-force as a result of ongoing profit improvement actions, offset by higher average earned premium per exposure resulting from rate increases associated with higher loss trends. Net Investment Income in theSpecialty Property & Casualty Insurance segment decreased by$3.1 million for the three months endedSeptember 30, 2022 , compared to the same period in 2021, due primarily to lower returns from Alternative Investments, partially offset by higher levels of investments in fixed income securities. Gain related to Change in Value of Alternative Energy Partnership Investments was$0.3 million for the three months endedSeptember 30, 2022 , compared to a loss of$11.3 million for the same period in 2021. Tax expense related to the Alternative Energy Partnership Investments was$0.1 million and tax benefit related to theAlternative Energy Partnership Investment was$14.4 million for the three months endedSeptember 30, 2022 and 2021, respectively. This resulted in net income of$0.2 million and$3.1 million attributable to Alternative Energy Partnership Investments for the three months endedSeptember 30, 2022 and 2021, respectively. Underlying losses and LAE as a percentage of earned premiums were 86.9% for the three months endedSeptember 30, 2022 , an improvement of 3.1 percentage points, compared to the same period in 2021, due primarily to lower frequency trends offset by higher claim severity trends. Frequency trends improved as a result of positive responses to targeted underwriting actions focused on improving profitability. 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$6.4 million for the three months endedSeptember 30, 2022 , compared to adverse development of$25.0 million for the same period in 2021. Catastrophe losses and LAE (excluding reserve development) were$14.8 million for the three months endedSeptember 30, 2022 , compared to$3.4 million for the same period in 2021, a deterioration of$11.4 million . Insurance Expenses were$198.8 million , or 19.9% of earned premiums, for the three months endedSeptember 30, 2022 , a deterioration of 1.0 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. 50 --------------------------------------------------------------------------------
Selected financial information for the personal automobile insurance product
line follows.
Nine Months Ended Three Months Ended
Sep 30, Sep 30, Sep 30, Sep 30,
(Dollars in Millions) 2022 2021 2022 2021
Net Premiums Written $ 2,542.3 $ 2,728.5 $ 805.2 $ 902.7
Earned Premiums $ 2,666.3 $ 2,615.6 $ 858.8 $ 920.6
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE $ 2,414.1
Catastrophe Losses and LAE
20.9 12.1 13.1 3.1Prior Years : Non-catastrophe Losses and LAE (32.2) 96.7 (6.7) 25.1 Catastrophe Losses and LAE 0.6 0.3 0.1 (0.1) Total Incurred Losses and LAE$ 2,403.4
Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 90.5 % 85.4 % 88.3 % 91.7 % Current Year Catastrophe Losses and LAE Ratio 0.8 0.5 1.5 0.3 Prior Years Non-catastrophe Losses and LAE Ratio (1.2) 3.7 (0.8) 2.7 Prior Years Catastrophe Losses and LAE Ratio - - - - Total Incurred Loss and LAE Ratio 90.1 % 89.6 % 89.0 % 94.7 %
Nine Months Ended
Earned Premiums from personal automobile insurance increased by$50.7 million for the nine months endedSeptember 30, 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$2,403.4 million , or 90.1% of earned premiums for the nine months endedSeptember 30, 2022 , compared to$2,344.5 million , or 89.6% 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, partially offset by a favorable change in prior year loss and LAE reserve development. Underlying losses and LAE as a percentage of related earned premiums were 90.5% for the nine months endedSeptember 30, 2022 , compared to 85.4% for the same period in 2021, a deterioration of 5.1 points due to higher claim severity trends. Severity trends increased due to rising inflation and supply chain constraints. Favorable loss and LAE reserve development was$31.6 million for the nine months endedSeptember 30, 2022 , compared to adverse development of$97.0 million for the same period in 2021. Catastrophe losses and LAE (excluding reserve development) were$20.9 million for the nine months endedSeptember 30, 2022 , compared to$12.1 million for the same period in 2021, due primarily to losses arising from Hurricane Ian.
Three Months Ended
Earned Premiums from personal automobile insurance decreased by$61.8 million for the three months endedSeptember 30, 2022 , compared to the same period in 2021, due primarily to decreases in new business driven by targeted underwriting actions focused on improving profitability. Incurred losses and LAE were$764.3 million , or 89.0% of earned premiums for the three months endedSeptember 30, 2022 , compared to$872.0 million , or 94.7% of earned premiums, for the same period in 2021. Incurred losses and LAE as a percentage of earned premiums decreased due primarily to a decrease in underlying losses and LAE as a percentage of earned premiums and favorable loss and LAE reserve development as a percentage of earned premium, compared to adverse loss and LAE reserve development as a percentage of earned premium in the same period of 2021. Underlying losses and LAE as a percentage of related earned premiums were 88.3% for the three months endedSeptember 30, 2022 , compared to 91.7% for the same period in 2021, an improvement of 3.4 points due to lower frequency trends offset by higher claim severity trends. Frequency trends improved as a result of positive responses to targeted underwriting actions focused on improving profitability. 51 --------------------------------------------------------------------------------
Severity trends increased due to rising inflation and supply chain constraints. Favorable loss and LAE reserve development was$6.6 million for the three months endedSeptember 30, 2022 , compared to adverse reserve development of$25.0 million for the same period in 2021. Catastrophe losses and LAE (excluding reserve development) were$13.1 million for the three months endedSeptember 30, 2022 , compared to$3.1 million for the same period in 2021, due primarily to losses arising from Hurricane Ian.
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) 2022 2021 2022 2021
Net Premiums Written $ 469.8 $ 349.8 $ 163.3 $ 121.6
Earned Premiums $ 398.5 $ 300.6 $ 140.7 $ 107.7
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE $ 295.8
Catastrophe Losses and LAE
2.2 1.1 1.7 0.3Prior Years : Non-catastrophe Losses and LAE 7.4 8.3 0.1 - Catastrophe Losses and LAE 0.1 - 0.1 - Total Incurred Losses and LAE$ 305.5
Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 74.2 % 71.9 % 78.3 % 74.7 % Current Year Catastrophe Losses and LAE Ratio 0.6 0.4 1.2 0.3 Prior Years Non-catastrophe Losses and LAE Ratio 1.9 2.8 0.1 - Prior Years Catastrophe Losses and LAE Ratio - - 0.1 - Total Incurred Loss and LAE Ratio 76.7 % 75.1 % 79.7 % 75.0 %
Nine Months Ended
Earned Premiums from commercial automobile insurance increased by$97.9 million for the nine months endedSeptember 30, 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$305.5 million , or 76.7% of earned premiums in 2022, compared to$225.8 million , or 75.1% of earned premiums in 2021. Incurred losses and LAE as a percentage of earned premiums increased due primarily to an increase in underlying losses and LAE as a percentage of earned premiums and lower development on prior year claims. Underlying losses and LAE as a percentage of earned premiums were 74.2% in 2022, compared to 71.9% in 2021, a deterioration of 2.3 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$7.5 million in 2022, compared to$8.3 million in 2021.
Three Months Ended
Earned Premiums from commercial automobile insurance increased by$33.0 million for the three months endedSeptember 30, 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$112.1 million , or 79.7% of earned premiums in 2022, compared to$80.8 million , or 75.0% of earned premiums in 2021. Incurred losses and LAE as a percentage of earned premiums increased due primarily to an increase in underlying losses and LAE as a percentage of earned premiums. Underlying losses and LAE as a percentage of earned premiums were 78.3% in 2022, compared to 74.7% in 2021, a deterioration of 3.6 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$0.2 million in 2022, compared to$0.0 million in 2021. 52 --------------------------------------------------------------------------------
Selected financial information for thePreferred Property & Casualty Insurance segment follows. Nine Months Ended Three Months Ended Sep 30, Sep 30, Sep 30, Sep 30, (Dollars in Millions) 2022 2021 2022 2021 Net Premiums Written$ 412.0 $ 488.8 $ 133.3 $ 164.8 Earned Premiums$ 454.8 $ 489.1 $ 149.3 $ 163.7 Net Investment Income 36.2 51.5 11.8 16.1 Changes in Value ofAlternative Energy Partnership Investments (5.0) (12.5) - (6.4) Other Income - - - - Total Revenues 486.0 528.1 161.1 173.4 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE 333.4 328.0 110.7 115.6 Catastrophe Losses and LAE 45.7 71.6 10.8 23.4 Prior Years: Non-catastrophe Losses and LAE 3.6 5.1 (0.3) - Catastrophe Losses and LAE (4.7) (3.6) (0.7) 0.1 Total Incurred Losses and LAE 378.0 401.1 120.5 139.1 Insurance Expenses 142.4 154.8 43.9 51.7 Operating Income (Loss) (34.4) (27.8) (3.3) (17.4) Income Tax Benefit (Expense) 9.4 22.7 1.2 11.0 Segment Net Operating Income (Loss)$ (25.0)
Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 73.3 % 67.1 % 74.2 % 70.6 % Current Year Catastrophe Losses and LAE Ratio 10.0 14.6 7.2 14.3 Prior Years Non-catastrophe Losses and LAE Ratio 0.8 1.0 (0.2) - Prior Years Catastrophe Losses and LAE Ratio (1.0) (0.7) (0.5) 0.1 Total Incurred Loss and LAE Ratio 83.1 82.0 80.7 85.0 Insurance Expense Ratio 31.3 31.6 29.4 31.6 Combined Ratio 114.4 % 113.6 % 110.1 % 116.6 % Underlying Combined Ratio Current Year Non-catastrophe Losses and LAE Ratio 73.3 % 67.1 % 74.2 % 70.6 % Insurance Expense Ratio 31.3 31.6 29.4 31.6 Underlying Combined Ratio 104.6 % 98.7 % 103.6 % 102.2 % Non-GAAP Measure Reconciliation Combined Ratio 114.4 % 113.6 % 110.1 % 116.6 %
Less:
Current Year Catastrophe Losses and LAE Ratio 10.0 14.6 7.2 14.3
Prior Years Non-catastrophe Losses and LAE Ratio 0.8 1.0 (0.2) -
Prior Years Catastrophe Losses and LAE Ratio (1.0) (0.7) (0.5) 0.1
Underlying Combined Ratio 104.6 % 98.7 % 103.6 % 102.2 %
53
--------------------------------------------------------------------------------
Catastrophe Frequency and Severity
Nine Months Ended
Sep 30, 2022 Sep 30, 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 49 $ 45.7 45 $ 36.5
$5 - $10 - - 3 20.4
$10 - $15 - - 1 14.7
$15 - $20 - - - -
$20 - $25 - - - -
Greater Than $25 - - - -
Total 49 $ 45.7 49 $ 71.6
Insurance Reserves
Sep 30, Dec 31,
(Dollars in Millions) 2022 2021
Insurance Reserves:
Personal Automobile $ 303.6 $ 308.6
Homeowners 93.7 95.4
Other 29.7 29.2
Insurance Reserves $ 427.0 $ 433.2
Insurance Reserves:
Loss and Allocated LAE Reserves:
Case and Allocated LAE $ 259.6 $ 272.5
Incurred But Not Reported 138.1 131.9
Total Loss and LAE Reserves 397.7 404.4
Unallocated LAE Reserves 29.3 28.8
Insurance Reserves $ 427.0 $ 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
Nine Months Ended
The Preferred Property & Casualty Insurance segment reported a Segment Net Operating Loss of$25.0 million for the nine months endedSeptember 30, 2022 , compared to a Segment Net Operating Loss of$5.1 million for the same period in 2021. Segment Net Operating Loss increased by$19.9 million due primarily to higher underlying losses and LAE as a percentage of earned premiums, partially offset by lower catastrophe losses and LAE and Net Investment Income. Earned Premiums in thePreferred Property & Casualty Insurance segment decreased by$34.3 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021, due primarily to lower personal automobile insurance volumes as a result of ongoing profit improvement actions. 54 --------------------------------------------------------------------------------
Net Investment Income in the
decreased by
compared to the same period in 2021, due primarily to lower returns from
Alternative Investments and lower levels of
Loss related to Changes in Value of Alternative Energy Partnership Investments was$5.0 million for the nine months endedSeptember 30, 2022 , compared to$12.5 million for the same period in 2021. Tax benefits related to the Alternative Energy Partnership Investments were$1.9 million and$18.1 million for the nine months endedSeptember 30, 2022 and 2021, respectively. This resulted in a net loss of$3.1 million and net income of$5.6 million attributable to Alternative Energy Partnership Investments for the nine months endedSeptember 30, 2022 and 2021, respectively. Underlying losses and LAE as a percentage of earned premiums were 73.3% and 67.1% for the nine months endedSeptember 30, 2022 and 2021, respectively. Underlying losses and LAE as a percentage of earned premiums increased primarily due to higher claim severity trends. Severity trends increased due to rising inflation and supply chain constraints. Catastrophe losses and LAE (excluding reserve development) were$45.7 million in 2022, compared to$71.6 million in 2021, a decrease of$25.9 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 were zero catastrophic events above$5 million in 2022, compared to four 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 adverse development of$1.5 million in 2021.
Insurance expenses were
improvement of 0.3% 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.
Three Months Ended
The Preferred Property & Casualty Insurance segment reported a Segment Net Operating Loss of$2.1 million for the three months endedSeptember 30, 2022 , compared to a Segment Net Operating Loss of$6.4 million for the same period in 2021. Segment Net Operating Loss decreased by$4.3 million due primarily to lower Catastrophe Losses and LAE as a percentage of earned premiums, partially offset by higher underlying losses and LAE as a percentage of earned premiums and lower Net Investment Income compared to the same period in 2021. Earned Premiums in thePreferred Property & Casualty Insurance segment decreased by$14.4 million for the three months endedSeptember 30, 2022 , compared to the same period in 2021, due primarily to lower personal automobile insurance volumes as a result of ongoing profit improvement actions.
Net Investment Income in the
decreased by
compared to the same period in 2021, due primarily to lower returns from
Alternative Investments.
Loss related to Changes in Value of Alternative Energy Partnership Investments was$0.0 million for the three months endedSeptember 30, 2022 , compared to$6.4 million for the same period in 2021. Tax benefits related to the Alternative Energy Partnership Investments were$0.0 million and$8.2 million for the three months endedSeptember 30, 2022 , and 2021, respectively. This resulted in a net income of$0.0 million and$1.8 million attributable to Alternative Energy Partnership Investments for the three months endedSeptember 30, 2022 and 2021, respectively. Underlying losses and LAE as a percentage of earned premiums were 74.2% and 70.6% for the three months endedSeptember 30, 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$10.8 million in 2022, compared to$23.4 million in 2021, a decrease 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 were zero catastrophic events 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$1.0 million in 2022, compared to adverse loss and LAE reserve development (including catastrophe reserve development) of$0.1 million in 2021. 55 --------------------------------------------------------------------------------
Insurance expenses were
improvement of 2.2% 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.
Nine Months Ended Three Months Ended
Sep 30, Sep 30, Sep 30, Sep 30,
(Dollars in Millions) 2022 2021 2022 2021
Net Premiums Written $ 242.1 $ 304.7 $ 73.3 $ 99.9
Earned Premiums $ 279.5 $ 309.1 $ 89.5 $ 102.6
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE $ 235.0 $ 234.2 $ 76.7 $ 84.8
Catastrophe Losses and LAE 3.2 6.1 1.1 2.7
Prior Years:
Non-catastrophe Losses and LAE 1.7 4.9 0.2 0.1
Catastrophe Losses and LAE 0.2 - 0.1 0.1
Total Incurred Losses and LAE $ 240.1 $ 245.2 $ 78.1 $ 87.7
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio 84.1 % 75.7 % 85.8 % 82.7 %
Current Year Catastrophe Losses and LAE Ratio 1.1 2.0 1.2 2.6
Prior Years Non-catastrophe Losses and LAE Ratio 0.6 1.6 0.2 0.1
Prior Years Catastrophe Losses and LAE Ratio 0.1 - 0.1 0.1
Total Incurred Loss and LAE Ratio 85.9 % 79.3 % 87.3 % 85.5 %
Nine Months Ended
Earned Premiums on personal automobile insurance decreased by$29.6 million for the nine months endedSeptember 30, 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$240.1 million , or 85.9% of earned premiums, for the nine months endedSeptember 30, 2022 , compared to$245.2 million , or 79.3% 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, partially offset by lower levels of prior year loss and LAE reserve development. Underlying losses and LAE as a percentage of earned premiums were 84.1% for the nine months endedSeptember 30, 2022 , compared to 75.7% for the same period in 2021, a deterioration of 8.4 percentage points primarily due to higher claim severity trends. Severity trends increased due to rising inflation and supply chain constraints. Adverse loss and LAE reserve development (including catastrophe loss reserve development) was$1.9 million for the nine months endedSeptember 30, 2022 , compared to$4.9 million for the same period in 2021. Catastrophe losses and LAE (excluding reserve development) were$3.2 million for the nine months endedSeptember 30, 2022 , compared to$6.1 million in for the same period in 2021.
Three Months Ended
Earned Premiums on preferred personal automobile insurance decreased by$13.1 million for the three months endedSeptember 30, 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$78.1 million , or 87.3% of earned premiums, for the three months endedSeptember 30, 2022 , compared to$87.7 million , or 85.5% of earned premiums, for the same period in 2021. Incurred losses and 56 --------------------------------------------------------------------------------
LAE as a percentage of earned premiums increased due primarily to a deterioration in the underlying loss and LAE ratio offset by lower incurred catastrophe losses (excluding loss reserve development). Underlying losses and LAE as a percentage of earned premiums were 85.8% for the three months endedSeptember 30, 2022 , compared to 82.7% for the same period in 2021, a deterioration of 3.1 percentage points primarily due to higher claim severity trends. Severity trends increased due to rising inflation and supply chain constraints. Adverse loss and LAE reserve development (including catastrophe loss reserve development) was$0.3 million for the three months endedSeptember 30, 2022 , compared to$0.2 million for the same period in 2021. Catastrophe losses and LAE (excluding reserve development) were$1.1 million for the three months endedSeptember 30, 2022 , compared to$2.7 million for the same period in 2021.Homeowners Insurance Selected financial information for the homeowners insurance product line follows. Nine Months Ended Three Months Ended Sep 30, Sep 30, Sep 30, Sep 30, (Dollars in Millions) 2022 2021 2022 2021 Net Premiums Written$ 147.5 $ 158.5 $ 52.8 $ 56.1 Earned Premiums$ 150.9 $ 154.6 $ 51.9 $ 52.5 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE$ 84.9 $ 81.3 $ 28.8 $ 26.6 Catastrophe Losses and LAE 41.5 64.2 9.4 20.4 Prior Years: Non-catastrophe Losses and LAE (1.7) (2.5) - (0.2) Catastrophe Losses and LAE (4.4) (1.8) (0.8) 0.1 Total Incurred Losses and LAE$ 120.3 $ 141.2 $ 37.4 $ 46.9 Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 56.2 % 52.6 % 55.5 % 50.6 % Current Year Catastrophe Losses and LAE Ratio 27.5 41.5 18.1 38.9 Prior Years Non-catastrophe Losses and LAE Ratio (1.1) (1.6) - (0.4) Prior Years Catastrophe Losses and LAE Ratio (2.9) (1.2) (1.5) 0.2 Total Incurred Loss and LAE Ratio 79.7 % 91.3 % 72.1 % 89.3 %
Nine Months Ended
Earned Premiums in homeowners insurance decreased by$3.7 million for the nine months endedSeptember 30, 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$120.3 million , or 79.7% of earned premiums, for the nine months endedSeptember 30, 2022 , compared to$141.2 million , or 91.3% 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. Underlying losses and LAE as a percentage of earned premiums were 56.2% for the nine months endedSeptember 30, 2022 , compared to 52.6% for the same period in 2021, a deterioration of 3.6 percentage points. Catastrophe losses and LAE (excluding reserve development) were$41.5 million for the nine months endedSeptember 30, 2022 , including Hurricane Ian, compared to$64.2 million for the same period in 2021. There were zero catastrophic events above$5 million for the nine months endedSeptember 30, 2022 , compared to four catastrophic events above$5 million for the same period in 2021. Favorable loss and LAE reserve development (including catastrophe loss reserve development) was$6.1 million for the nine months endedSeptember 30, 2022 , compared to$4.3 million for the same period in 2021. 57 --------------------------------------------------------------------------------
Three Months Ended
Earned Premiums in homeowners insurance decreased by
months ended
primarily to lower volume as a result of ongoing profit improvement actions.
Incurred losses and LAE were$37.4 million , or 72.1% of earned premiums, for the three months endedSeptember 30, 2022 , compared to$46.9 million , or 89.3% 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). Underlying losses and LAE as a percentage of earned premiums were 55.5% for the three months endedSeptember 30, 2022 , compared to 50.6% for the same period in 2021, an increase of 4.9 percentage points. Catastrophe losses and LAE (excluding reserve development) were$9.4 million for the three months endedSeptember 30, 2022 , including Hurricane Ian, compared to$20.4 million for the same period in 2021. There were zero catastrophic events above$5 million for the three months endedSeptember 30, 2022 , compared to one catastrophic event above$5 million for the same period in 2021. Favorable loss and LAE reserve development (including catastrophe loss reserve development) was$0.8 million for the three months endedSeptember 30, 2022 , compared to$0.1 million for the same period in 2021.
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.
Nine Months Ended Three Months Ended
Sep 30, Sep 30, Sep 30, Sep 30,
(Dollars in Millions) 2022 2021 2022 2021
Net Premiums Written $ 22.4 $ 25.6 $ 7.2 $ 8.8
Earned Premiums $ 24.4 $ 25.4 $ 7.9 $ 8.6
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE $ 13.5 $ 12.5 $ 5.2 $ 4.2
Catastrophe Losses and LAE 1.0 1.3 0.3 0.3
Prior Years:
Non-catastrophe Losses and LAE 3.6 2.7 (0.5) 0.1
Catastrophe Losses and LAE (0.5) (1.8) - (0.1)
Total Incurred Losses and LAE $ 17.6 $ 14.7 $ 5.0 $ 4.5
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio 55.2 % 49.3 % 65.8 % 48.8 %
Current Year Catastrophe Losses and LAE Ratio 4.1 5.1 3.8 3.5
Prior Years Non-catastrophe Losses and LAE Ratio 14.8 10.6 (6.3) 1.2
Prior Years Catastrophe Losses and LAE Ratio (2.0) (7.1) - (1.2)
Total Incurred Loss and LAE Ratio 72.1 % 57.9 % 63.3 % 52.3 %
Nine Months Ended
Earned Premiums in other personal insurance decreased by$1.0 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021. Incurred losses and LAE was$17.6 million , or 72.1% of earned premiums for the nine months endedSeptember 30, 2022 , compared to$14.7 million , or 57.9% of earned premiums, for the same period in 2021. Underlying losses and LAE as a percentage of earned premiums were 55.2% for the nine months endedSeptember 30, 2022 , compared to 49.3% for the same period in 2021, a deterioration of 5.9 percentage points. Catastrophe losses and LAE (excluding loss reserve development) was$1.0 million for the nine months endedSeptember 30, 2022 , compared to$1.3 million for the same period in 2021. Adverse loss and LAE reserve development (including catastrophe losses development) for the nine months endedSeptember 30, 2022 was$3.1 million , compared to$0.9 million for the same period in 2021. 58 --------------------------------------------------------------------------------
Three Months Ended
Earned Premiums in other personal insurance decreased by$0.7 million for the three months endedSeptember 30, 2022 , compared to the same period in 2021. Incurred losses and LAE were$5.0 million , or 63.3% of earned premiums, for the three months endedSeptember 30, 2022 , compared to$4.5 million , or 52.3% of earned premiums, for the same period in 2021. Underlying losses and LAE as a percentage of earned premiums were 65.8% for the three months endedSeptember 30, 2022 , compared to 48.8% for the same period in 2021, a deterioration of 17.0 percentage points. Catastrophe losses and LAE (excluding loss reserve development) was$0.3 million for the three months endedSeptember 30, 2022 , compared to$0.3 million for the same period in 2021. Favorable loss and LAE reserve development (including catastrophe losses development) for the three months endedSeptember 30, 2022 was$0.5 million , compared to favorable development of$0.0 million for the same period in 2021. 59 --------------------------------------------------------------------------------
Selected financial information for theLife & Health Insurance segment follows. Nine Months Ended Three Months Ended Sep 30, Sep 30, Sep 30, Sep 30, (Dollars in Millions) 2022 2021 2022 2021 Earned Premiums$ 479.7 $ 489.3 $ 158.2 $ 164.1 Net Investment Income 163.9 151.9 52.6 48.4 Changes in Value ofAlternative Energy Partnership Investments (5.6) (12.1) 0.1 (6.1) Other Income (0.8) 0.3 - 0.1 Total Revenues 637.2 629.4 210.9 206.5 Policyholders' Benefits and Incurred Losses and LAE 339.2 353.5 105.6 119.5 Insurance Expenses 262.2 269.4 91.5 92.9 Operating Income (Loss) 35.8 6.5 13.8 (5.9) Income Tax Benefit (Expense) (2.4) 16.6 (1.2) 8.7 Segment Net Operating Income (Loss)$ 33.4 $ 23.1 $ 12.6 $ 2.8 INSURANCE RESERVES Dec 31, (Dollars in Millions) Sep 30, 2022 2021 Insurance Reserves: Future Policyholder Benefits$ 3,505.0 $ 3,454.1 Incurred Losses and LAE Reserves: Life 55.7 60.7 Accident and Health 23.4 26.1 Property 3.6 3.6 Total Incurred Losses and LAE Reserves 82.7 90.4 Insurance Reserves (1)$ 3,587.7 $ 3,544.5 (1)September 30, 2022 includes reserves classified as Liabilities Held-for-Sale on the Condensed Consolidated Balance Sheets. See Note 4, "Dispositions," for more information.
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 .
Overall
Nine Months Ended
Earned Premiums in theLife & Health Insurance segment decreased by$9.6 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021. This is due primarily to lower volume on accident and health insurance products and property insurance products, partially offset by higher volume on life insurance products. Net Investment Income increased by$12.0 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021, due primarily to higher levels of investments inFixed Income Securities , higher returns from Alternative Investments and higher levels of investments and rate onCompany-Owned Life Insurance , partially offset by lower yields onFixed Income Securities and lower levels of investments and yields onEquity Securities . 60 --------------------------------------------------------------------------------
Loss related to Changes in Value of Alternative Energy Partnership Investments was$5.6 million for the nine months endedSeptember 30, 2022 , compared to$12.1 million for the same period in 2021. Tax benefits related to the Alternative Energy Partnership Investments were$2.1 million and$17.6 million for the nine months endedSeptember 30, 2022 and 2021, respectively. This resulted in net loss of$3.5 million and net income of$5.5 million attributable to Alternative Energy Partnership Investments for the nine months endedSeptember 30, 2022 and 2021, respectively. Policyholders' Benefits and Incurred Losses and LAE decreased by$14.3 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021, due primarily to lower mortality for life insurance, lower frequency of accident and health insurance claims and lower current year property catastrophe losses and LAE.
Insurance Expenses in the
million
period in 2021, due primarily to lower commission expense and a reduction in
expenses due to lower volume of accident and health insurance products and
property insurance products.
Segment Net Operating Income in theLife & Health Insurance segment was$33.4 million for the nine months endedSeptember 30, 2022 , compared to$23.1 million in 2021.
federal statutory income tax rate due primarily to investment tax credits,
tax-exempt investment income, and dividends received deductions.
Three Months Ended
Earned Premiums in theLife & Health Insurance segment decreased by$5.9 million for the three months endedSeptember 30, 2022 , compared to the same period in 2021. This is due primarily to lower volume on accident and health insurance products and property insurance products.
Net Investment Income increased by
levels of investments in
Insurance
Income related to Changes in Value of Alternative Energy Partnership Investments was$0.1 million for the three months endedSeptember 30, 2022 , compared to loss of$6.1 million for the same period in 2021. Tax expense related to the Alternative Energy Partnership Investments was$0.0 million for the three months endedSeptember 30, 2022 , compared to tax benefits of$8.0 million for the same period in 2021. This resulted in net income of$0.1 million and$1.9 million attributable to Alternative Energy Partnership Investments for the three months endedSeptember 30, 2022 and 2021, respectively. Policyholders' Benefits and Incurred Losses and LAE decreased by$13.9 million for the three months endedSeptember 30, 2022 , compared to the same period in 2021, due primarily to lower mortality for life insurance, lower frequency of accident and health insurance claims and lower current year property catastrophe losses and LAE.
Insurance Expenses in the
million
period in 2021, due primarily to lower commission expense.
Segment Net Operating Income in theLife & Health Insurance segment was$12.6 million for the three months endedSeptember 30, 2022 , compared to$2.8 million in 2021.
federal statutory income tax rate due primarily to investment tax credits,
tax-exempt investment income and dividends received deductions.
61
--------------------------------------------------------------------------------
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) 2022 2021 2022 2021
Earned Premiums $ 304.6 $ 300.2 $ 100.4 $ 101.5
Net Investment Income 159.0 147.5 51.0 47.0
Changes in Value of Alternative Energy Partnership
Investments (5.2) (11.5) 0.1 (5.8)
Other Income (1.2) - (0.1) -
Total Revenues 457.2 436.2 151.4 142.7
Policyholders' Benefits and Incurred Losses and LAE 253.3 257.1 78.6 87.3
Insurance Expenses 178.8 175.1 62.5 61.5
Operating Income (Loss) 25.1 4.0 10.3 (6.1)
Income Tax Benefit (Expense) (0.3) 16.3 (0.5) 8.4
Total Product Line Net Operating Income (Loss) $ 24.8 $ 20.3 $ 9.8 $ 2.3
Nine Months Ended
Earned Premiums from life insurance increased by$4.4 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021, due primarily to increased volume of sales. Policyholders' Benefits and Incurred Losses and LAE on life insurance were$253.3 million for the nine months endedSeptember 30, 2022 , compared to$257.1 million for the same period in 2021, a decrease of$3.8 million due primarily to lower mortality. Insurance Expenses increased by$3.7 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021, due primarily to higher commission from a higher volume of life insurance products.
Three Months Ended
Earned Premiums from life insurance decreased by$1.1 million for the three months endedSeptember 30, 2022 , compared to the same period in 2021. Policyholders' Benefits and Incurred Losses and LAE on life insurance were$78.6 million for the three months endedSeptember 30, 2022 , compared to$87.3 million for the same period 2021, a decrease of$8.7 million due primarily to lower mortality.
Insurance Expenses increased by
62
--------------------------------------------------------------------------------
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) 2022 2021 2022 2021
Earned Premiums $ 136.8 $ 142.3 $ 45.9 $ 47.0
Net Investment Income 2.5 2.7 0.8 0.9
Changes in Value of Alternative Energy Partnership
Investments (0.1) (0.2) - (0.1)
Other Income 0.4 0.3 0.1 0.1
Total Revenues 139.6 145.1 46.8 47.9
Policyholders' Benefits and Incurred Losses and LAE 70.3 74.2 22.3 22.9
Insurance Expenses 63.3 70.1 22.4 23.5
Operating Income (Loss) 6.0 0.8 2.1 1.5
Income Tax Benefit (Expense) (1.2) 0.1 (0.4) (0.2)
Total Product Line Net Operating Income (Loss) $ 4.8 $ 0.9 $ 1.7 $ 1.3
Nine Months Ended
Earned Premiums from accident and health insurance decreased by$5.5 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021. This is due primarily to lower volume of sales. Policyholders' Benefits and Incurred Losses and LAE on accident and health insurance were$70.3 million for the nine months endedSeptember 30, 2022 , compared to$74.2 million for the same period in 2021. This is due primarily to lower frequency of claims.
Insurance Expenses decreased by
volume of accident and health insurance products.
Three Months Ended
Earned Premiums from accident and health insurance decreased by$1.1 million for the three months endedSeptember 30, 2022 , compared to the same period in 2021. This is due primarily to lower volume of sales. Policyholders' Benefit and Incurred Losses and LAE on accident and health insurance were$22.3 million for the three months endedSeptember 30, 2022 , compared to$22.9 million for the same period in 2021. This is due primarily to lower frequency of claims.
Insurance Expenses decreased by
volume of accident and health insurance products.
63 --------------------------------------------------------------------------------
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) 2022 2021 2022 2021
Earned Premiums $ 38.3 $ 46.8 $ 11.9 $ 15.6
Net Investment Income (Loss) 2.4 1.7 0.8 0.5
Changes in Value of Alternative Energy Partnership
Investments (0.3) (0.4) - (0.2)
Total Revenues 40.4 48.1 12.7 15.9
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE 10.5 11.0 2.8 3.6
Catastrophe Losses and LAE 2.4 10.1 1.4 5.7
Prior Years:
Non-catastrophe Losses and LAE 1.2 1.2 0.1 0.4
Catastrophe Losses and LAE 1.5 (0.1) 0.4 (0.4)
Total Incurred Losses and LAE 15.6 22.2 4.7 9.3
Insurance Expenses 20.1 24.2 6.6 7.9
Operating Income (Loss) 4.7 1.7 1.4 (1.3)
Income Tax Benefit (Expense) (0.9) 0.2 (0.3) 0.5
Total Product Line Net Operating Income (Loss) $ 3.8 $ 1.9 $ 1.1 $ (0.8)
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio 27.4 % 23.4 % 23.5 % 23.1 %
Current Year Catastrophe Losses and LAE Ratio 6.3 21.6 11.8 36.5
Prior Years Non-catastrophe Losses and LAE Ratio 3.1 2.6 0.8 2.6
Prior Years Catastrophe Losses and LAE Ratio 3.9 (0.2) 3.4 (2.6)
Total Incurred Loss and LAE Ratio 40.7 % 47.4 % 39.5 % 59.6 %
Nine Months Ended
Earned Premiums from property insurance decreased by$8.5 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021, due primarily to lower volume of property insurance products. Incurred losses and LAE on property insurance were$15.6 million , or 40.7% of earned premiums, for the nine months endedSeptember 30, 2022 , compared to$22.2 million , or 47.4% of earned premiums for the same period in 2021. Underlying losses and LAE were$10.5 million , or 27.4% of earned premiums for the nine months endedSeptember 30, 2022 , compared to$11.0 million , or 23.4% of earned premiums for the same period in 2021, an increase of 4.0 percentage points due primarily to higher claim severity. Catastrophe losses and LAE (excluding loss reserve development) were$2.4 million for the nine months endedSeptember 30, 2022 , compared to$10.1 million for the same period in 2021. Catastrophe losses and LAE decreased$7.7 million due primarily to lower frequency of catastrophe claims. Adverse loss and LAE reserve development was$2.7 million for the nine months endedSeptember 30, 2022 , compared to adverse development of$1.1 million in the same period in 2021.
Insurance expenses decreased
volume of property insurance products.
Three Months Ended
Earned Premiums from property insurance decreased by$3.7 million for the three months endedSeptember 30, 2022 , compared to the same period in 2021, due primarily to lower volume of property insurance products. Incurred losses and LAE on property insurance were$4.7 million , or 39.5% of earned premiums, for the three months endedSeptember 30, 2022 , compared to$9.3 million , or 59.6% of earned premiums for the same period in 2021. Underlying losses and LAE were$2.8 million , or 23.5% of 64 --------------------------------------------------------------------------------
earned premiums for the three months endedSeptember 30, 2022 , compared to$3.6 million , or 23.1% of earned premiums for the same period in 2021, an increase of 0.4 percentage points due primarily to higher claim severity. Catastrophe losses and LAE (excluding loss reserve development) were$1.4 million for the three months endedSeptember 30, 2022 , compared to$5.7 million for the same period in 2021. Catastrophe losses and LAE decreased$4.3 million due primarily to lower frequency and lower severity of catastrophe claims. Adverse loss and LAE reserve development was$0.5 million for the three months endedSeptember 30, 2022 , compared to no development for the same period in 2021.
Insurance expenses decreased
volume of property insurance products.
Investment Results
Net Investment Income
Net Investment Income for the nine and three months endedSeptember 30, 2022 and 2021 was: Nine Months Ended Three Months Ended Sep 30, Sep 30, Sep 30, Sep 30, (Dollars in Millions) 2022 2021 2022 2021 Investment Income: Interest on Fixed Income Securities$ 218.4 $ 207.1 $ 76.9 $ 68.4
Dividends on Equity Securities Excluding Alternative
Investments
4.3 9.8 1.1 2.9 Alternative Investments: Equity Method Limited Liability Investments 28.0 50.9 (0.6) 12.0 Limited Liability Investments Included in Equity Securities 34.9 29.3 8.8 9.5 Total Alternative Investments 62.9 80.2 8.2 21.5 Short-term Investments 1.4 0.6 1.1 0.2 Loans to Policyholders 16.3 16.3 5.5 5.4 Real Estate 7.6 7.1 3.1 2.3 Company-Owned Life Insurance 28.0 18.3 9.9 7.2 Other 5.1 4.8 1.7 1.9 Total Investment Income 344.0 344.2 107.5 109.8 Investment Expenses: Real Estate 5.8 6.8 2.3 2.6 Other Investment Expenses 21.9 18.5 7.4 5.3 Total Investment Expenses 27.7 25.3 9.7 7.9 Net Investment Income$ 316.3 $ 318.9 $ 97.8 $ 101.9 Net Investment Income was$316.3 million and$318.9 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Net Investment Income decreased by$2.6 million in 2022 due primarily to lower valuations on Equity Method Limited Liability Investments, lower rate onFixed Income Securities , and lower balances inEquity Securities , partially offset by higher levels of investments inFixed Income Securities andCompany-Owned Life Insurance and higher volume of distributions received from appreciated Limited Liability Investments included inEquity Securities . Net Investment Income was$97.8 million and$101.9 million for the three months endedSeptember 30, 2022 and 2021, respectively. Net Investment Income decreased by$4.1 million in 2022 due primarily to lower valuations on Equity Method Limited Liability Investments, partially offset by higher levels of investments inFixed Income Securities andCompany-Owned Life Insurance . 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. 65 --------------------------------------------------------------------------------
Investment Results (Continued)
Total Comprehensive Investment Gains (Losses)
The components of Total Comprehensive Investment Gains (Losses) for the nine and
three months ended
Nine Months Ended Three Months Ended
Sep 30, Sep 30, Sep 30, Sep 30,
(Dollars in Millions) 2022 2021 2022 2021
Recognized in Condensed Consolidated Statements of
Income:
Income (Loss) from Change in Fair Value of Equity and
Convertible Securities $ (79.9) $ 92.4 $ (11.2) $ (0.6)
Gains on Sales 34.6 45.0 18.7 10.7
Losses on Sales (34.2) (1.9) (30.5) (0.6)
Gains (Losses) on Hedging Activity - - (0.3) -
Impairment Losses (22.1) (7.8) (8.3) (0.6)
Statements of Income
(101.6) 127.7 (31.6) 8.9 Recognized in Other Comprehensive Income (Loss) (1,644.5) (255.9) (412.3) (79.3) Total Comprehensive Investment Gains (Losses)$ (1,746.1)
Total Comprehensive Investment Losses were$1,746.1 million and$128.2 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Total Comprehensive Investment Losses increased by$1,617.9 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. Total Comprehensive Investment Losses were$443.9 million for the three months endedSeptember 30, 2022 compared to Total Comprehensive Investment Losses of$70.4 million in the same period 2021. Total Comprehensive Investment Losses increased by$373.5 million primarily due to a decrease in the fair value of the Company's fixed income bond portfolio and a loss from the change in fair value of the Company's fair value method equity and convertible securities.
Income (Loss) from Change in Fair Value of
The components of Income (Loss) from Change in Fair Value ofEquity and Convertible Securities for the nine and three months endedSeptember 30, 2022 and 2021 were: Nine Months Ended Three Months Ended Sep 30, Sep 30, Sep 30, Sep 30, (Dollars in Millions) 2022 2021 2022 2021 Preferred Stocks$ (8.4) $ 1.8 $ (2.5) $ 0.1 Common Stocks (0.5) 3.2 0.8 (1.1) Other Equity Interests: Exchange Traded Funds (52.1) 50.1 (6.6) (7.1) Limited Liability Companies and Limited Partnerships (14.5) 35.5 (2.3) 7.9 Total Other Equity Interests (66.6) 85.6 (8.9) 0.8 Income (Loss) from Change in Fair Value of Equity Securities (75.5) 90.6 (10.6) (0.2)
Income (Loss) from Change in Fair Value of
Securities
(4.4) 1.8 (0.6) (0.4) Income (Loss) from Change in Fair Value of Equity and Convertible Securities$ (79.9) $ 92.4 $ (11.2) $ (0.6) 66
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Investment Results (Continued)
Net Realized Investment Gains (Losses)
The components of Net Realized Investment Gains (Losses) for the nine and three
months ended
Nine Months Ended Three Months Ended
Sep 30, Sep 30, Sep 30, Sep 30,
(Dollars in Millions) 2022 2021 2022 2021
Fixed Maturities:
Gains on Sales $ 28.0 $ 42.7 $ 14.2 $ 10.3
Losses on Sales (27.5) (1.7) (23.9) (0.4)
Gains (Losses) on Hedging Activity - - (0.3) -
Equity Securities:
Gains on Sales 6.6 1.8 4.5 0.1
Losses on Sales (6.7) (0.2) (6.6) (0.2)
Equity Method Limited Liability Investments:
Gains on Sales - 0.4 - 0.4
Real Estate:
Gains on Sales - 0.1 - (0.1)
Net Realized Investment Gains (Losses) $ 0.4 $ 43.1 $ (12.1) $ 10.1
Gross Gains on Sales $ 34.6 $ 45.0 $ 18.7 $ 10.7
Gross Losses on Sales (34.2) (1.9) (30.5) (0.6)
Gains (Losses) on Hedging Activity - - (0.3) -
Net Realized Investment Gains (Losses) $ 0.4 $ 43.1 $ (12.1) $ 10.1
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 ended September 30, 2022 and
2021 were:
Nine Months Ended Three Months Ended
Sep 30, 2022 Sep 30, 2021 Sep 30, 2022 Sep 30, 2021
(Dollars in Millions) Amount Number of Issuers Amount Number of Issuers Amount Number of Issuers Amount Number of Issuers
Fixed Maturities $ (22.1) 39 $ (3.3) 15 $ (8.3) 34 $ 0.5 -
Equity Securities - - (4.1) 13 - - (0.7) 2
Real Estate - - (0.4) 1 - - (0.4) 1
Impairment Losses $ (22.1) $ (7.8) $ (8.3) $ (0.6)
Investment Quality and Concentrations
The Company's fixed maturity investment portfolio is comprised primarily of high-grade corporate, municipal and agency bonds. AtSeptember 30, 2022 , 95.1% 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 67 --------------------------------------------------------------------------------
Investment Quality and Concentrations (Continued)
from
Investors Service ("Moody's"); or a rating of
Ratings.
The following table summarizes the credit quality of the Company's fixed
maturity investment portfolio at
(Dollars in Millions) Sep 30, 2022 Dec 31, 2021
NAIC
Rating Rating Fair Value Percentage Fair Value Percentage
1 AAA, AA, A $ 4,717.6 70.6 % $ 5,351.6 67.0 %
2 BBB 1,639.2 24.5 2,215.1 27.7
3-4 BB, B 251.4 3.8 331.0 4.2
5-6 CCC or Lower 70.9 1.1 89.2 1.1
Total Investments in Fixed Maturities (1) $ 6,679.1 100.0 % $ 7,986.9
100.0 %
(1) Includes securities classified as Held-for-Sale Assets on the Condensed Consolidated Balance Sheets. See Note 4, "Dispositions," for more
information.
Gross unrealized losses on the Company's investments in below-investment-grade fixed maturities were$33.1 million and$9.0 million atSeptember 30, 2022 andDecember 31, 2021 , respectively.
The following table summarizes the fair value of the Company's investments in
governmental fixed maturities at
Sep 30, 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 $ 526.8 6.1 % $ 637.4 6.1 %
States and Political Subdivisions:
Revenue Bonds 1,240.4 14.4 1,516.1 14.6 States 200.8 2.3 235.8 2.3 Political Subdivisions 110.9 1.3 138.2 1.3 Foreign Governments 3.7 - 5.5 0.1
Total Investments in Governmental Fixed Maturities
24.1 %$ 2,533.0 24.4 % The following table summarizes the fair value of the Company's investments in non-governmental fixed maturities by industry atSeptember 30, 2022 andDecember 31, 2021 . Sep 30, 2022 Dec 31, 2021 Percentage Percentage of Total of Total (Dollars in Millions) Fair Value Investments Fair Value Investments Finance, Insurance and Real Estate$ 1,972.7 22.8 %$ 1,996.7 19.2 % Manufacturing 1,046.9 12.1 1,571.0 15.1 Transportation, Communication and Utilities 689.8 8.0 815.8 7.9 Services 524.4 6.1 617.5 5.9 Mining 167.6 1.9 254.3 2.4 Retail Trade 158.7 1.8 171.4 1.7 Construction 21.6 0.3 13.1 0.1 Other 14.8 0.2 14.1 0.1 Total Investments in Non-governmental Fixed Maturities$ 4,596.5 53.2 %$ 5,453.9 52.4 % 68
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Investment Quality and Concentrations (Continued)
The following table summarizes the fair value of the Company's investments in non-governmental fixed maturities by range of amount invested atSeptember 30, 2022 . (Dollars in Millions) Number of Issues Aggregate Fair Value Below$5 789 $ 1,504.9$5 -$10 193 1,452.9$10 -$20 93 1,266.6$20 -$30 13 304.7 Greater Than$30 2 67.4 Total 1,090 $ 4,596.5 The Company's short-term investments primarily consist of money market funds and short term bonds. AtSeptember 30, 2022 , the Company had$173.6 million invested in money market funds which primarily invest inU.S. Treasury securities and$184.0 million invested inU.S. treasury bills and short-term bonds. TheSeptember 30, 2022 short-term investments balance includes$0.4 million of short-term investments classified as Held-for-Sale Assets on the Condensed Consolidated Balance Sheets. See Note 4, "Dispositions," for more information. The following table summarizes the fair value of the Company's ten largest investment exposures in a single issuer, excluding investments inU.S. Government and Government Agencies and Authorities and Short-term Investments, atSeptember 30, 2022 : Percentage Fair of Total (Dollars in Millions) Value Investments Fixed Maturities: States including their Political Subdivisions: Texas$ 133.3 1.5 % California 84.7 1.0 Georgia 78.2 0.9 Michigan 76.7 0.9 Louisiana 63.5 0.7 New York 61.9 0.7 Pennsylvania 61.4 0.7 Florida 55.2 0.6 Colorado 51.5 0.6
Vanguard Total World Stock ETF 58.4 0.7 Total$ 724.8 8.3 % 69
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Investment Quality and Concentrations (Continued)
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 atSeptember 30, 2022 andDecember 31, 2021 is presented below. Unfunded Commitment Reported Value Sep 30, Sep 30, Dec 31, (Dollars in Millions) 2022 2022 2021 Reported as Equity Method Limited Liability Investments: Mezzanine Debt$ 36.7 $ 121.0 $ 120.0 Senior Debt 44.7 23.8 27.5 Distressed Debt - 4.4 21.7 Secondary Transactions 1.7 11.1 11.7 Leveraged Buyout 0.6 9.2 8.7 Growth Equity - 1.3 0.7 Real Estate - 43.4 29.9 Hedge Fund - 0.5 8.7 Other - 11.3 13.0 Total Equity Method Limited Liability Investments 83.7 226.0 241.9 Alternative Energy Partnership Investments - 16.9 39.6 Reported as Other Equity Interests at Fair Value: Mezzanine Debt 48.2 107.3 129.3 Senior Debt 6.2 21.7 29.9 Distressed Debt 19.3 29.0 44.9 Secondary Transactions 4.2 3.6 4.0 Hedge Funds - 21.4 82.7 Leveraged Buyout 6.4 20.6 32.2 Growth Equity 8.2 5.1 2.0 Total Reported as Other Equity Interests at Fair Value 92.5 208.7 325.0
Reported as
Other - 8.3 7.7 Total Reported as Equity Securities at Modified Cost - 8.3 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.
70
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Expenses
Expenses for the nine and three months endedSeptember 30, 2022 and 2021 were: Nine Months Ended Three Months Ended Sep 30, Sep 30, Sep 30, Sep 30, (Dollars in Millions) 2022 2021 2022 2021 Insurance Expenses: Commissions$ 559.1 $ 625.3 $ 176.3 $ 210.0 General Expenses 272.0 252.0 93.5 85.1 Taxes, Licenses and Fees 74.2 79.1 23.6 26.5 Total Costs Incurred 905.3 956.4 293.4 321.6 Net Policy Acquisition Costs Amortized (Deferred) 4.3 (87.3) 7.3 (23.8) Amortization of Value of Business Acquired ("VOBA") 3.4 39.9 0.6 13.5 Insurance Expenses 913.0 909.0 301.3 311.3 Loss from Early Extinguishment of Debt 3.7 - - - Interest and Other Expenses: Interest Expense 41.0 33.0 14.3 10.7 Other Expenses: Acquisition and Disposition Related Transaction, Integration, Restructuring and Other Costs 27.3 34.7 12.7 8.0 Other 102.8 111.5 36.5 44.0 Other Expenses 130.1 146.2 49.2 52.0 Interest and Other Expenses 171.1 179.2 63.5 62.7 Total Expenses$ 1,087.8 $ 1,088.2 $ 364.8 $ 374.0 Insurance Expenses Insurance Expenses were$913.0 million for the nine months endedSeptember 30, 2022 , compared to$909.0 million for the same period in 2021. Insurance Expenses increased by$4.0 million in 2022 due primarily to net amortization of policy acquisition costs as the acquisition of AAC led to higher deferrals in 2021. This is partially offset by a corresponding decrease in the amortization of VOBA from the acquisition of AAC and lower commissions as premium growth has slowed due to ongoing profit improvement actions. Insurance Expenses were$301.3 million for the three months endedSeptember 30, 2022 , compared to$311.3 million for the same period in 2021. Insurance Expenses decreased by$10.0 million in 2022 due primarily to lower commissions as premium growth has slowed due to ongoing profit improvement actions and a decrease in the amortization of the VOBA asset established as a result of the acquisition of AAC in 2021. This is partially offset by net amortization of policy acquisition costs due to the slowing of premium growth as part of the ongoing profit improvement actions.
Interest and Other Expenses
Interest and Other Expenses was$171.1 million for the nine months endedSeptember 30, 2022 , compared to$179.2 million for the same period in 2021. Interest expense increased by$8.0 million in 2022 due primarily to the addition of the 2032 Senior Notes and the 2062 Junior Debentures in 2022. Other expenses decreased by$16.1 million in 2022 due primarily to lower acquisition and integration costs, partially offset by the loss on the sale of RNIC and goodwill impairment. Interest and Other Expenses was$63.5 million for the three months endedSeptember 30, 2022 , compared to$62.7 million for the same period in 2021. Interest expense increased by$3.6 million in 2022 due primarily to the addition of the 2032 Senior Notes and the 2062 Junior Debentures in 2022. Other expenses decreased by$2.8 million in 2022 due primarily to lower overhead expenses, partially offset by the loss on the sale of RNIC and goodwill impairment. 71 --------------------------------------------------------------------------------
Income Taxes
The federal corporate statutory income tax rate was 21% for the nine months endedSeptember 30, 2022 andSeptember 30, 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, (5) a permanent difference associated with nondeductible executive compensation, and (6) taxes related to sold and available for sale subsidiaries. The Inflation Reduction Act (the "Law") was signed into law onAugust 16, 2022 , which will become generally effective onJanuary 1, 2023 . Included in the provisions of the Law are various changes to the tax code, including the establishment of a Corporate Alternative Minimum tax. Kemper has evaluated the the provisions of the Law and do not expect a material impact. The Company will continue to monitor guidance released by theIRS andTreasury . Tax-exempt investment income and dividends received deductions collectively were$17.9 million for the nine months endedSeptember 30, 2022 , compared to$16.4 million for the same period in 2021. Tax-exempt investment income and dividends received deductions collectively were$5.6 million for the three months endedSeptember 30, 2022 , compared to$5.0 million for the same period in 2021. The nontaxable increase in cash surrender value onCompany-Owned Life Insurance was$28.0 million for the nine months endedSeptember 30, 2022 , compared to$18.2 million for the same period in 2021. The nontaxable increase in cash surrender value onCompany-Owned Life Insurance was$9.9 million for the three months endedSeptember 30, 2022 , compared to$7.2 million for the same period in 2021. The Company realized net investment and other federal income tax credits of$5.8 million and$2.3 million for the nine months ended and three months endedSeptember 30, 2022 , respectively. 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. The amount of expense recognized for long-term equity-based compensation expense under GAAP was$6.1 million higher than the amount that would be deductible under the IRC for the nine months endedSeptember 30, 2022 , compared to$1.6 million lower for the same period in 2021. The amount of expense recognized for long-term equity-based compensation expense under GAAP was$1.0 million higher than the amount that would be deductible under the IRC for the three months endedSeptember 30, 2022 , compared to$0.2 million higher for the same period in 2021. The amount of nondeductible executive compensation was$9.3 million for the nine months endedSeptember 30, 2022 , compared to$10.5 million for the same period in 2021. The amount of nondeductible executive compensation was$3.1 million for the three months endedSeptember 30, 2022 , compared to$3.5 million for the same period in 2021.
The amount of tax expense recognized related to sold and available for sale
subsidiaries was
2022
Recently Issued Accounting Pronouncements
The Company has adopted all recently issued accounting pronouncements with
effective dates prior to
accounting pronouncements during the nine months ended
had a material impact on the Company's Condensed Consolidated Financial
Statements.
72
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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 atSeptember 30, 2022 andDecember 31, 2021 was: Sep 30, 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 449.3 449.0 2.400% Senior Notes due September 30, 2030 396.5 396.2 3.800% Senior Notes due February 23, 2032 395.3 - 5.875% Fixed-Rate Reset Junior Subordinated Debentures Due 2062 145.3 - Total Long-term Debt Outstanding
See Note 15, "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 eitherSeptember 30, 2022 orDecember 31, 2021 .
Federal Home Loan Bank Agreements
Kemper's subsidiaries, United Insurance, Trinity,American Access Casualty Company , and Alliance are members of the FHLB ofChicago ,Dallas ,Chicago , andSan Francisco , respectively.American Access Casualty Company became a member of the FHLB ofChicago inMay 2022 . 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,American Access Casualty Company , and Alliance may borrow through the advance program of their respective FHLB. As a requirement of membership in the FHLB, United Insurance, Trinity,American Access Casualty Company , 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$16.1 million and$11.8 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. The carrying value of FHLB ofDallas common stock was$3.4 million and$3.4 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. The carrying value of FHLB ofSan Francisco common stock was$1.4 million and$1.7 million atSeptember 30, 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. During the first nine months of 2022, United Insurance received advances of$319.1 million from the FHLB ofChicago and made repayments of$118.3 million . United Insurance had outstanding advances from the FHLB ofChicago totaling$602.6 million atSeptember 30, 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$686.8 million atSeptember 30, 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 14, "Policyholder Obligations," to the Condensed Consolidated Financial Statements for additional information about the United Insurance advances and related funding agreements. 73
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Liquidity and Capital Resources (Continued)
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 ofSeptember 30, 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 nine months endedSeptember 30, 2022 the Company did not repurchase any shares of its common stock. During the nine months endedSeptember 30, 2021 the Company repurchased approximately 2,085,000 shares of its common stock under its share repurchase authorization for an aggregate cost of$161.7 million and an average cost per share of$77.58 . During the three months endedSeptember 30, 2022 the Company did not repurchase any shares of its common stock. During the three months endedSeptember 30, 2021 the Company repurchased 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 .
Dividends to Shareholders
Kemper paid a quarterly dividend to shareholders of$0.31 per common share in the third quarter of 2022. Dividends and dividend equivalents paid were$59.9 million for the nine months endedSeptember 30, 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 paid$300.0 million in dividends to Kemper during the first nine months of 2022. Kemper estimates that its direct insurance subsidiaries would be able to pay approximately$31.4 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 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. 74
--------------------------------------------------------------------------------
Liquidity and Capital Resources (Continued)
Information about the Company's cash flows for nine months ended
2022
DOLLARS IN MILLIONS Sep 30, 2022 Sep 30, 2021 Net Cash Provided by (Used in) Operating Activities$ (170.1) $ 307.6 Net Cash Provided by (Used in) Investing Activities (129.6) (99.0) Net Cash Provided by (Used in) Financing Activities 403.8
(294.9)
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 in Operating Activities was$170.1 million for the nine months endedSeptember 30, 2022 , compared to net cash provided of$307.6 million for the same period in 2021, a decrease of$477.7 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.
Cash Provided by (Used in) Investing Activities
Net cash used in Investing Activities for the nine months endedSeptember 30, 2022 was$129.6 million , compared to$99.0 million for the same period in 2021, a decrease of$30.6 million . This was primarily due to lower net sales of short term investments. Net sales of short term investments in 2021 were primarily used to fund the purchase of AAC and the repurchase of Kemper common stock. Proceeds from the sale of equity securities increased as the Company shifted its investment portfolio more heavily to fixed maturities. This is partially offset by higher proceeds from the sale of equity securities.
Cash Provided by (Used in) Financing Activities
Net cash provided by Financing Activities for the nine months endedSeptember 30, 2022 was$403.8 million , compared to cash used of$294.9 million for the same period in 2021, an increase of$698.7 million . This was primarily due to the issuance of the 2032 Senior Notes and 2062 Junior Debentures, share repurchases in 2021, and increased net advances under the FHLB spread-lending program due to a more attractive interest rate environment in 2022. These were partially of offset by the redemption of the 2022 Senior Notes.
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.
UNUM GROUP – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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