Newswires
KEMPER CORP – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Summary of Results
As discussed in Note 1, "Basis of Presentation and Accounting Policies", to the Condensed Consolidated Financial Statements effectiveJanuary 1, 2023 , the Company adopted Accounting Standards Update No. 2018-12, "Targeted Improvements to the Accounting for Long-Duration Contracts and related amendments" ("LDTI") under the modified retrospective method. Prior period amounts in the financial statements have been adjusted to reflect application of the new guidance. Related financial data shown in Management's Discussion and Analysis of Financial Condition and Results of Operations also have been adjusted. Net Loss was$80.1 million ($(1.25) per unrestricted common share) for the three months endedMarch 31, 2023 , compared to Net Loss of$86.3 million ($(1.36) per unrestricted common share) for the same period in 2022.
A reconciliation of Net Loss to Adjusted Consolidated Net Operating Income
(Loss) (a non-GAAP financial measure) for the three months ended
and 2022 is presented below.
Three Months Ended
Mar 31, Mar 31, Increase
(Dollars in Millions and Net of Income Taxes) 2023 2022 (Decrease)
Net Loss $ (80.1) $ (86.3) $ 6.2
Less:
Income (Loss) from Change in Fair Value of Equity and Convertible
Securities 1.3 (22.3) 23.6
Net Realized Investment Gains 5.1 1.2 3.9
Impairment Gains (Losses) 1.7 (7.0) 8.7
Acquisition and Disposition Related Transaction, Integration,
Restructuring and Other Costs
(23.0) (3.7) (19.3) Debt Extinguishment, Pension, and Other Charges - (2.9)$ 2.9 Adjusted Consolidated Net Operating Loss $
(65.2)
Components of Adjusted Consolidated Net Operating (Loss) Income:
Segment Net Operating (Loss) Income:
$ (58.4) $ (44.7) $ (13.7) Preferred Property & Casualty Insurance (9.5) (6.1) (3.4) Life & Health Insurance 13.2 11.6 1.6 Segment Net Operating Loss (54.7) (39.2) (15.5)
Corporate and Other Net Operating Loss From:
Other (10.5) (12.4) 1.9 Corporate and Other Net Operating Loss (10.5) (12.4) 1.9 Adjusted Consolidated Net Operating Loss$ (65.2) $ (51.6) $ (13.6) Net Loss Net Loss decreased by$6.2 million for the three months endedMarch 31, 2023 , compared to the same period in 2022, due primarily to increased income from Change in Fair Value of Equity and Convertible securities, partially offset by increases in Acquisition and Disposition Related Transaction, Integration, Restructuring and Other Costs. Adjusted Consolidated Net Operating Loss increased by$13.6 million for the three months endedMarch 31, 2023 , compared to the same period in 2022, due primarily to higher Segment Insurance Net Operating Losses in the Specialty and Preferred Property & Casualty Segments, partially offset by higher net income in the Life and Health Insurance Segment.
See "
Insurance
segment's results. Corporate and Other Net Operating Loss decreased due
primarily to increases in Net Investment Income.
42 --------------------------------------------------------------------------------
Summary of Results (Continued)
Revenues
Earned Premiums were$1,180.9 million for the three months endedMarch 31, 2023 , compared to$1,320.0 million for the same period in 2022, a decrease of$139.1 million . Earned Premiums in theSpecialty Property & Casualty Insurance segment decreased by$77.4 million for the three months endedMarch 31, 2023 , compared to the same period in 2022. Earned Premiums in thePreferred Property & Casualty Insurance segments decreased by$18.2 million for the three months endedMarch 31, 2023 , compared to the same period in 2022. Earned premiums in theLife & Health Insurance segments decreased by$43.5 million for the three months endedMarch 31, 2023 , compared to the same period in 2022. See "Specialty Property & Casualty Insurance ", "Preferred Property & Casualty Insurance ," and "Life & Health Insurance " for discussion of the changes in each segment's earned premiums. Net Investment Income increased by$1.8 million for the three months endedMarch 31, 2023 , compared to the same period in 2022, due primarily to higher rates and levels of investments inFixed Income Securities and higher rates on Short Term Investments offset by lower returns onEquity Method Limited Liability Investments and lower balances inEquity Securities . Gain from the Change in Value of Alternative Energy Partnership Investments was$0.7 million for the three months endedMarch 31, 2023 , compared to loss of$16.7 million for the same period 2022. Tax expense related to the Alternative Energy Partnership Investments were$0.3 million and tax benefits of$7.0 million for the three months endedMarch 31, 2023 and 2022, respectively. This resulted in a net income of$0.4 million and net loss of$9.7 million attributable to Alternative Energy Partnership Investments for the three months endedMarch 31, 2023 and 2022, respectively.
Other Income was
compared to
Net Realized Gains on Sales of Investments were
months ended
2022.
Impairment Gains were
compared to an Impairment Loss of
See "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. 43 --------------------------------------------------------------------------------
Non-GAAP Financial Measures (Continued)
Adjusted Consolidated Net Operating (Loss) Income
Adjusted Consolidated Net Operating (Loss) Income is an after-tax, non-GAAP
financial measure and is computed by excluding from Net (Loss) Income the
after-tax impact of
(i) (Loss) Income from Change in Fair Value of
Securities
(ii) Net Realized Gains or Losses on Sales of Investments;
(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 (Loss) Income. There were no applicable significant non-recurring items that the Company excluded from the calculation of Adjusted Consolidated Net Operating (Loss) Income for the three months endedMarch 31, 2023 or 2022. The Company believes that Adjusted Consolidated Net Operating (Loss) Income provides investors with a valuable measure of its ongoing performance because it reveals underlying operational performance trends that otherwise might be less apparent if the items were not excluded. (Loss) Income from Change in Fair Value ofEquity and Convertible Securities , Net Realized Gains or Losses on Sales of Investments and Impairment Losses related to investments included in the Company's results may vary significantly between periods and are generally driven by business decisions and external economic developments such as capital market conditions that impact the values of the Company's investments, the timing of which is unrelated to the insurance underwriting process. Acquisition and Disposition Related Transaction Costs, Integration Costs, and 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 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. 44 --------------------------------------------------------------------------------
Selected financial information for the
segment follows.
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2023 2022
Net Premiums Written $ 1,022.1 $ 1,023.7
Earned Premiums $ 944.2 $ 1,021.6
Net Investment Income 38.5 34.9
Change in Value of Alternative Energy Partnership Investments 0.4 (8.4)
Other Income 0.9 1.7
Total Revenues 984.0 1,049.8
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE 825.4 911.7
Catastrophe Losses and LAE 8.4 2.1
Prior Years:
Non-catastrophe Losses and LAE 31.6 (3.8)
Catastrophe Losses and LAE (0.5) 0.7
Total Incurred Losses and LAE 864.9 910.7
Insurance Expenses 193.8 199.3
Operating Loss (74.7) (60.2)
Income Tax Benefit 16.3 15.5
Segment Net Operating Loss $ (58.4) $ (44.7)
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio 87.5 % 89.2 %
Current Year Catastrophe Losses and LAE Ratio 0.9 0.2
Prior Years Non-catastrophe Losses and LAE Ratio 3.3 (0.4)
Prior Years Catastrophe Losses and LAE Ratio (0.1) 0.1
Total Incurred Loss and LAE Ratio 91.6 89.1
Insurance Expense Ratio 20.5 19.5
Combined Ratio 112.1 % 108.6 %
Underlying Combined Ratio
Current Year Non-catastrophe Losses and LAE Ratio 87.5 % 89.2 %
Insurance Expense Ratio 20.5 19.5
Underlying Combined Ratio 108.0 % 108.7 %
Non-GAAP Measure Reconciliation
Combined Ratio 112.1 % 108.6 %
Less:
Current Year Catastrophe Losses and LAE Ratio 0.9 0.2
Prior Years Non-catastrophe Losses and LAE Ratio 3.3 (0.4)
Prior Years Catastrophe Losses and LAE Ratio (0.1) 0.1
Underlying Combined Ratio 108.0 % 108.7 %
45
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Insurance Reserves
Mar 31, Dec 31,
(Dollars in Millions) 2023 2022
Insurance Reserves:
Personal Automobile $ 1,805.6 $ 1,875.8
Commercial Automobile 491.4 445.3
Insurance Reserves $ 2,297.0 $ 2,321.1
Insurance Reserves:
Loss and Allocated LAE Reserves:
Case and Allocated LAE $ 1,094.8 $ 1,099.9
Incurred But Not Reported 1,027.0 1,041.2
Total Loss and LAE Reserves 2,121.8 2,141.1
Unallocated LAE Reserves 175.2 180.0
Insurance Reserves $ 2,297.0 $ 2,321.1
See "Critical Accounting Estimates," of the 2022 Annual Report for additional
information pertaining to the Company's process of estimating property and
casualty insurance reserves for losses and LAE, development of property and
casualty insurance losses and LAE from prior accident years, also referred to as
"reserve development" in the discussion of segment results, estimated
variability of property and casualty insurance reserves for losses and LAE, and
a discussion of some of the variables that may impact development of property
and casualty insurance losses and LAE and the estimated variability of property
and casualty insurance reserves for losses and LAE.
Overall
Three Months Ended
The Specialty Property & Casualty Insurance segment reported a Segment Net Operating Loss of$58.4 million for the three months endedMarch 31, 2023 , compared to a Net Operating Loss of$44.7 million for the same period in 2022. Segment net operating losses increased by$13.7 million mostly driven by a$14.4 million decrease in net income from our commercial automobile insurance business due primarily to an increase in the underlying loss ratio from higher claim frequency. The decrease was partially offset by an$0.7 million increase in net income from personal automobile insurance due primarily to higher average earned premiums per exposure resulting from rate increases that were mostly offset by unfavorable prior year loss and LAE development. Earned Premiums in theSpecialty Property & Casualty Insurance segment decreased by$77.4 million for the three months endedMarch 31, 2023 , compared to the same period in 2022, due to a decrease in new business resulting from targeted underwriting actions to improve profitability, partially offset by higher average earned premium per exposure from rate increases. Net Investment Income in theSpecialty Property & Casualty Insurance segment increased by$3.6 million for the three months endedMarch 31, 2023 , compared to the same period in 2022, due primarily to higher rates inFixed Income Securities and Short Term Investments offset by lower returns on Equity Method Limited Liability Investments and lower balances inEquity Securities . Income related to the Change in Value ofAlternative Energy Partnership Investments was$0.4 million for the three months endedMarch 31, 2023 , compared to a loss of$8.4 million for the same period in 2022. Tax expenses related to the Alternative Energy Partnership Investments was$0.1 million for the three months endedMarch 31, 2023 , compared to a tax benefit of$3.6 million for the three months endedMarch 31, 2022 . This resulted in a net income of$0.3 million and net loss of$4.8 million attributable toAlternative Energy Partnership Investments for the three months endedMarch 31, 2023 and 2022, respectively. Underlying losses and LAE as a percentage of earned premiums were 87.5% for the three months endedMarch 31, 2023 , an improvement of 1.7 percentage points, compared to the same period in 2022, driven by higher average earned premium per exposure resulting from rate increases mostly offset by higher claims frequency from commercial automobile insurance. Underlying losses and LAE exclude the impact of catastrophes and loss and LAE reserve development. Unfavorable loss and LAE reserve development (including catastrophe reserve development) was$31.1 million for the three months ended 46 --------------------------------------------------------------------------------
March 31, 2023 , compared to$3.1 million of favorable development for the same period in 2022. Catastrophe losses and LAE (excluding reserve development) were$8.4 million for the three months endedMarch 31, 2023 , compared to$2.1 million for the same period in 2022, a deterioration of$6.3 million .
Insurance Expenses were
three months ended
compared to the same period in 2022.
The Specialty Property & Casualty Insurance segment's effective income tax rate differs from the federal statutory income tax rate due primarily to investments inCorporate Owned Life Insurance , tax-exempt investment income and dividends received deductions.
Selected financial information for the personal automobile insurance product
line follows.
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2023 2022
Net Premiums Written $ 842.4 $ 884.8
Earned Premiums $ 787.9 $ 901.7
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE $ 697.6 $ 827.7
Catastrophe Losses and LAE 7.7 2.0
Prior Years:
Non-catastrophe Losses and LAE 23.4 (9.0)
Catastrophe Losses and LAE (0.5) 0.7
Total Incurred Losses and LAE
Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 88.5 % 91.8 % Current Year Catastrophe Losses and LAE Ratio 1.0 0.2 Prior Years Non-catastrophe Losses and LAE Ratio 3.0 (1.0) Prior Years Catastrophe Losses and LAE Ratio (0.1) 0.1 Total Incurred Loss and LAE Ratio
92.4 % 91.1 %
Three Months Ended
Earned Premiums from personal automobile insurance decreased by$113.8 million for the three months endedMarch 31, 2023 , compared to the same period in 2022, due to a decrease in new business driven by targeted underwriting actions to improve profitability, partially offset by higher average earned premium per exposure resulting from rate increases. Incurred losses and LAE were$728.2 million , or 92.4% of earned premiums for the three months endedMarch 31, 2023 , compared to$821.4 million , or 91.1% of earned premiums, for the same period in 2022. Incurred losses and LAE as a percentage of earned premiums increased due primarily to unfavorable prior year loss and LAE development, offset by improvement in underlying losses and LAE as a percentage of earned premium. Underlying losses and LAE as a percentage of earned premiums were 88.5% for the three months endedMarch 31, 2023 , compared to 91.8% for the same period in 2022, an improvement of 3.3 points. Unfavorable loss and LAE reserve development was$22.9 million for the three months endedMarch 31, 2023 , compared to favorable development of$8.3 million for the same period in 2022. Catastrophe losses and LAE (excluding reserve development) were$7.7 million for the three months endedMarch 31, 2023 primarily driven by multipleCalifornia weather events, compared to$2.0 million for the same period in 2022. 47 --------------------------------------------------------------------------------
Selected financial information for the commercial automobile insurance product
line follows.
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2023 2022
Net Premiums Written $ 179.7 $ 138.9
Earned Premiums $ 156.3 $ 119.9
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE $ 127.8 $ 84.0
Catastrophe Losses and LAE 0.7 0.1
Prior Years:
Non-catastrophe Losses and LAE 8.2 5.2
Catastrophe Losses and LAE - -
Total Incurred Losses and LAE $ 136.7 $ 89.3
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio 81.9 % 70.1 %
Current Year Catastrophe Losses and LAE Ratio 0.4 0.1
Prior Years Non-catastrophe Losses and LAE Ratio 5.2 4.3
Prior Years Catastrophe Losses and LAE Ratio - -
Total Incurred Loss and LAE Ratio 87.5 % 74.5 %
Three Months Ended
Earned Premiums from commercial automobile insurance increased by$36.4 million for the three months endedMarch 31, 2023 , compared to the same period in 2022, due primarily to higher volume and higher average earned premium per exposure. Incurred losses and LAE were$136.7 million , or 87.5% of earned premiums in 2023, compared to$89.3 million , or 74.5% of earned premiums in 2022. Incurred losses and LAE as a percentage of earned premiums increased due primarily to a deterioration in underlying losses and LAE as a percentage of earned premiums, as well as adverse loss and LAE reserve development. Underlying losses and LAE as a percentage of earned premiums were 81.9% in 2023, compared to 70.1% in 2022, a deterioration of 11.8 percentage points due primarily to a higher frequency of bodily injury claims. Severity trends increased due to rising inflation and supply chain constraints. Adverse loss and LAE reserve development was$8.2 million for the three months endedMarch 31, 2023 , compared to$5.2 million for the same period in 2022. 48 --------------------------------------------------------------------------------
Selected financial information for the
segment follows.
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2023 2022
Net Premiums Written $ 124.0 $ 137.4
Earned Premiums $ 137.4 $ 155.6
Net Investment Income 10.5 12.5
Changes in Value of Alternative Energy Partnership Investments 0.1 (3.9)
Total Revenues 148.0 164.2
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE 90.4 112.2
Catastrophe Losses and LAE 17.0 11.4
Prior Years:
Non-catastrophe Losses and LAE 6.9 2.1
Catastrophe Losses and LAE 2.9 (3.2)
Total Incurred Losses and LAE 117.2 122.5
Insurance Expenses 43.0 51.2
Operating Loss (12.2) (9.5)
Income Tax Benefit 2.7 3.4
Segment Net Operating Loss
Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 65.8 % 72.2 % Current Year Catastrophe Losses and LAE Ratio 12.4 7.3 Prior Years Non-catastrophe Losses and LAE Ratio 5.0 1.3 Prior Years Catastrophe Losses and LAE Ratio 2.1 (2.1) Total Incurred Loss and LAE Ratio 85.3 78.7 Insurance Expense Ratio 31.3 32.9 Combined Ratio 116.6 % 111.6 % Underlying Combined Ratio Current Year Non-catastrophe Losses and LAE Ratio 65.8 % 72.2 % Insurance Expense Ratio 31.3 32.9 Underlying Combined Ratio 97.1 % 105.1 % Non-GAAP Measure Reconciliation Combined Ratio 116.6 % 111.6 %
Less:
Current Year Catastrophe Losses and LAE Ratio 12.4 7.3
Prior Years Non-catastrophe Losses and LAE Ratio 5.0 1.3
Prior Years Catastrophe Losses and LAE Ratio 2.1 (2.1)
Underlying Combined Ratio 97.1 % 105.1 %
49
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CATASTROPHE FREQUENCY AND SEVERITY
Three Months Ended
Mar 31, 2023 Mar 31, 2022
Number of Losses and Number of Losses and
(Dollars in Millions) Events LAE Events LAE
Range of Losses and LAE Per Event
Below $5 24 $ 17.0 11 $ 11.4
$5 - $10 - - - -
$10 - $15 - - - -
$15 - $20 - - - -
$20 - $25 - - - -
Greater Than $25 - - - -
Total 24 $ 17.0 11 $ 11.4
INSURANCE RESERVES
Mar 31, Dec 31,
(Dollars in Millions) 2023 2022
Insurance Reserves:
Personal Automobile $ 284.1 $ 298.4
Homeowners 94.7 91.8
Other 29.1 28.9
Insurance Reserves $ 407.9 $ 419.1
Insurance Reserves:
Loss and Allocated LAE Reserves:
Case and Allocated LAE $ 250.3 $ 251.6
Incurred But Not Reported 129.0 139.0
Total Loss and LAE Reserves 379.3 390.6
Unallocated LAE Reserves 28.6 28.5
Insurance Reserves $ 407.9 $ 419.1
See "Critical Accounting Estimates," of the 2022 Annual Report for additional
information pertaining to the Company's process of estimating property and
casualty insurance reserves for losses and LAE, development of property and
casualty insurance losses and LAE from prior accident years, also referred to as
"reserve development" in the discussion of segment results, estimated
variability of property and casualty insurance reserves for losses and LAE, and
a discussion of some of the variables that may impact development of property
and casualty insurance losses and LAE and the estimated variability of property
and casualty insurance reserves for losses and LAE.
Overall
Three Months Ended
The Preferred Property & Casualty Insurance segment reported a Segment Net Operating Loss of$9.5 million for the three months endedMarch 31, 2023 , compared to Segment Net Operating Loss of$6.1 million for the same period in 2022. Segment net operating results decreased by$3.4 million mostly driven by a$6.9 million decrease in net income from homeowners insurance due primarily to higher prior year loss and LAE development and higher levels of catastrophe activity, partially offset by a$3.7 million increase in net income from preferred personal automobile insurance mostly due to higher average earned premiums per exposure from resulting rate increases and lower automobile frequency of claims. 50 --------------------------------------------------------------------------------
Earned Premiums in thePreferred Property & Casualty Insurance segment decreased by$18.2 million for the three months endedMarch 31, 2023 , compared to the same period in 2022, due primarily to lower personal automobile insurance volumes as a result of ongoing profit improvement actions. Net Investment Income in thePreferred Property & Casualty Insurance segment decreased by$2.0 million for the three months endedMarch 31, 2023 , compared to the same period in 2022, due primarily to lower returns onEquity Method Limited Liability Investments offset by higher rates inFixed Income Securities . Income related to Changes in Value of Alternative Energy Partnership Investments was$0.1 million for the three months endedMarch 31, 2023 , compared to a loss of$3.9 million for the same period in 2022. Tax expense related to the Alternative Energy Partnership Investments was$0.1 million for the three months endedMarch 31, 2023 , compared to a tax benefit of$1.6 million for the three months endedMarch 31, 2022 . This resulted in a net income of$0.0 million and net loss of$2.3 million attributable toAlternative Energy Partnership Investments for the three months endedMarch 31, 2023 and 2022, respectively. Underlying losses and LAE as a percentage of earned premiums were 65.8% and 72.2% for the three months endedMarch 31, 2023 and 2022, respectively. Underlying losses and LAE as a percentage of earned premiums decreased as a result of higher average earned premiums per exposure resulting from rate increases and lower frequency of auto claims. Catastrophe losses and LAE (excluding reserve development) were$17.0 million in 2023 primarily driven byCalifornia rain events, compared to$11.4 million in 2022, an increase of$5.6 million . Catastrophe losses and LAE (excluding reserve development) increased due primarily to an increase in frequency of catastrophic events in 2023, compared to the same period in 2022. There were no catastrophic events above$5 million in 2023 or in the same period in 2022. Unfavorable loss and LAE reserve development (including catastrophe reserve development) was$9.8 million in 2023, compared to favorable development of$1.1 million in 2022.
Insurance expenses were
improvement of 1.6% percentage points compared to 2022.
The Preferred Property & Casualty Insurance segment's effective income tax rate differs from the federal statutory income tax rate due primarily to investments inCompany-Owned Life Insurance , tax-exempt investment income and dividends received deductions.
Selected financial information for the personal automobile insurance product
line follows.
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2023 2022
Net Premiums Written $ 71.8 $ 84.2
Earned Premiums $ 78.2 $ 96.0
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE $ 62.7 $ 80.5
Catastrophe Losses and LAE 1.2 0.5
Prior Years:
Non-catastrophe Losses and LAE 2.9 1.5
Catastrophe Losses and LAE 0.5 0.1
Total Incurred Losses and LAE $ 67.3 $ 82.6
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio 80.3 % 83.8 %
Current Year Catastrophe Losses and LAE Ratio 1.5 0.5
Prior Years Non-catastrophe Losses and LAE Ratio 3.7 1.6
Prior Years Catastrophe Losses and LAE Ratio 0.6 0.1
Total Incurred Loss and LAE Ratio 86.1 % 86.0 %
51
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Three Months Ended
Earned Premiums in preferred personal automobile insurance decreased by$17.8 million for the three months endedMarch 31, 2023 , compared to the same period in 2022, due primarily to lower volume as a result of ongoing profit improvement actions. Incurred losses and LAE were$67.3 million , or 86.1% of earned premiums, for the three months endedMarch 31, 2023 , compared to$82.6 million , or 86.0% of earned premiums, for the same period in 2022. Incurred losses and LAE as a percentage of earned premiums decreased due primarily to an improvement in the underlying loss and LAE ratio, offset by unfavorable prior year development. Underlying losses and LAE as a percentage of earned premiums were 80.3% for the three months endedMarch 31, 2023 , compared to 83.8% for the same period in 2022, an improvement of 3.5 percentage points due to ongoing profit improvement actions. Adverse loss and LAE reserve development (including catastrophe loss reserve development) was$3.4 million for the three months endedMarch 31, 2023 , compared to$1.6 million for the same period in 2022. Catastrophe losses and LAE (excluding reserve development) were$1.2 million for the three months endedMarch 31, 2023 , compared to$0.5 million for the same period in 2022.Homeowners Insurance Selected financial information for the homeowners insurance product line follows. Three Months Ended Mar 31, Mar 31, (Dollars in Millions) 2023 2022 Net Premiums Written$ 46.2 $ 45.5 Earned Premiums$ 52.2 $ 51.3 Incurred Losses and LAE related to: Current Year: Non-catastrophe Losses and LAE$ 23.9 $ 27.5 Catastrophe Losses and LAE 14.9 10.8 Prior Years: Non-catastrophe Losses and LAE 3.1 (1.6) Catastrophe Losses and LAE 2.4 (2.8) Total Incurred Losses and LAE$ 44.3 $ 33.9 Ratios Based On Earned Premiums Current Year Non-catastrophe Losses and LAE Ratio 45.9 % 53.6 % Current Year Catastrophe Losses and LAE Ratio 28.5 21.1 Prior Years Non-catastrophe Losses and LAE Ratio 5.9 (3.1) Prior Years Catastrophe Losses and LAE Ratio 4.6 (5.5) Total Incurred Loss and LAE Ratio 84.9 % 66.1 %
Three Months Ended
Earned Premiums in homeowners insurance increased by$0.9 million for the three months endedMarch 31, 2023 , compared to the same period in 2022 driven by higher average earned premium per exposure resulting from rate increases. Incurred losses and LAE were$44.3 million , or 84.9% of earned premiums, for the three months endedMarch 31, 2023 , compared to$33.9 million , or 66.1% of earned premiums, for the same period in 2022. Incurred losses and LAE as a percentage of earned premiums increased due primarily to higher incurred catastrophe losses (excluding loss reserve development),and unfavorable development on prior year underlying and catastrophe losses and LAE, partially offset by lower underlying losses and LAE as a percentage of earned premiums. Underlying losses and LAE as a percentage of earned premiums were 45.9% for the three months endedMarch 31, 2023 , compared to 53.6% for the same period in 2022, a decrease of 7.7 percentage points. Catastrophe losses and LAE (excluding reserve development) were$14.9 million for the three months endedMarch 31, 2023 , compared to$10.8 million for the same period in 2022. There were no catastrophic events above$5 million in 2023, or in the same period in 2022. Unfavorable loss and LAE reserve development (including catastrophe loss reserve development) was$5.5 million for the three months endedMarch 31, 2023 , compared to favorable development of$4.4 million for the same period in 2022. 52 --------------------------------------------------------------------------------
Other
Other personal insurance products include umbrella, dwelling fire, inland
marine, earthquake, boat owners and other liability coverages. Selected
financial information for other personal insurance product lines follows.
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2023 2022
Net Premiums Written $ 6.0 $ 7.7
Earned Premiums $ 7.0 $ 8.3
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE $ 3.8 $ 4.2
Catastrophe Losses and LAE 0.9 0.1
Prior Years:
Non-catastrophe Losses and LAE 0.9 2.2
Catastrophe Losses and LAE - (0.5)
Total Incurred Losses and LAE $ 5.6 $ 6.0
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio 54.2 % 50.6 %
Current Year Catastrophe Losses and LAE Ratio 12.9 1.2
Prior Years Non-catastrophe Losses and LAE Ratio 12.9 26.5
Prior Years Catastrophe Losses and LAE Ratio - (6.0)
Total Incurred Loss and LAE Ratio 80.0 % 72.3 %
Three Months Ended
Earned Premiums in other personal insurance decreased by$1.3 million for the three months endedMarch 31, 2023 , compared to the same period in 2022. Incurred losses and LAE were$5.6 million , or 80.0% of earned premiums, for the three months endedMarch 31, 2023 , compared to$6.0 million , or 72.3% of earned premiums, for the same period in 2022. Underlying losses and LAE as a percentage of earned premiums were 54.2% for the three months endedMarch 31, 2023 , compared to 50.6% for the same period in 2022, a deterioration of 3.6 percentage points. Catastrophe losses and LAE (excluding loss reserve development) were$0.9 million for the three months endedMarch 31, 2023 , compared to$0.1 million for the same period in 2022. Adverse loss and LAE reserve development (including catastrophe losses development) for the three months endedMarch 31, 2023 was$0.9 million , compared to$1.7 million for the same period in 2022. 53 --------------------------------------------------------------------------------
Selected financial information for theLife & Health Insurance segment follows. Three Months Ended Mar 31, Mar 31, (Dollars in Millions) 2023 2022 Earned Premiums$ 99.3 $ 142.8 Net Investment Income 49.8 49.4 Changes in Value of Alternative Energy Partnership Investments 0.2 (4.4) Other Loss (0.4) - Total Revenues 148.9 187.8 Policyholders' Benefits and Incurred Losses and LAE 69.9 89.9 Insurance Expenses 64.2 85.9 Operating Income 14.8 12.0 Income Tax Expense (1.6) (0.4) Segment Net Operating Income$ 13.2 $ 11.6 INSURANCE RESERVES Mar 31, Dec 31, (Dollars in Millions) 2023 2022 Insurance Reserves: Future Policyholder Benefits$ 3,346.9 $ 3,218.5 Incurred Losses and LAE Reserves: Life 48.3 53.3 Accident and Health 4.4 4.3 Property 2.7 2.3 Total Incurred Losses and LAE Reserves 55.4 59.9 Insurance Reserves$ 3,402.3 $ 3,278.4
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 Incurred But Not Reported ("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 .
See Note 1 "Summary of Accounting Policies and Accounting Changes," to the
Consolidated Financial Statements under the sub-caption "Insurance Reserves" for
additional discussion.
Overall
Three Months Ended
Segment Net Operating Income in theLife & Health Insurance segment was$13.2 million for the three months endedMarch 31, 2023 , compared to$11.6 million in 2022. Earned Premiums in theLife & Health Insurance segment decreased by$43.5 million for the three months endedMarch 31, 2023 , compared to the same period in 2022, due primarily to the disposition of Reserve National inDecember 2022 and lower volume on property insurance products. 54 --------------------------------------------------------------------------------
Net Investment Income increased by
rate earned on
Method Limited Liability Investments and increased investment expenses.
Income related to Changes in Value of Alternative Energy Partnership Investments was$0.2 million for the three months endedMarch 31, 2023 , compared to loss of$4.4 million for the same period in 2022. Tax expenses related to the Alternative Energy Partnership Investments were$0.1 million and tax benefits of$1.8 million for the three months endedMarch 31, 2023 and 2022, respectively. This resulted in a net income of$0.1 million and net loss of$2.6 million attributable to Alternative Energy Partnership Investments for the three months endedMarch 31, 2023 and 2022, respectively. Policyholders' Benefits and Incurred Losses and LAE decreased by$20.0 million for the three months endedMarch 31, 2023 , compared to the same period in 2022, due primarily to the disposition of Reserve National inDecember 2022 and lower current year property non-catastrophe losses and LAE. Insurance Expenses in theLife & Health Insurance segment decreased by$21.7 million for the three months endedMarch 31, 2023 , compared to the same period in 2022, due primarily to the disposition of Reserve National inDecember 2022 , lower commission expense and a reduction in expenses due to lower volume of property insurance products.The Life & Health Insurance segment's effective income tax rate differs from the federal statutory income tax rate due primarily to investments inCompany-Owned Life Insurance , tax-exempt investment income and dividends received deductions.
Life Insurance
Selected financial information for the life insurance product line follows.
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2023 2022
Earned Premiums $ 82.2 $ 82.7
Net Investment Income 49.5 47.9
Changes in Value of Alternative Energy Partnership Investments 0.2 (4.0)
Other Loss (0.5) -
Total Revenues 131.4 126.6
Policyholders' Benefits and Incurred Losses and LAE 64.1 60.4
Insurance Expenses 56.1 58.2
Operating Income 11.2 8.0
Income Tax (Expense) Benefit (0.9) 0.3
Total Product Line Net Operating Income $ 10.3 $ 8.3
Three Months Ended
Earned Premiums from life insurance decreased by$0.5 million for the three months endedMarch 31, 2023 , compared to the same period in 2022, due primarily to lower volume of life insurance products and partially offset by increased average premium rate. Policyholders' Benefits and Incurred Losses and LAE on life insurance were$64.1 million for the three months endedMarch 31, 2023 , compared to$60.4 million for the same period in 2022, an increase of$3.7 million due primarily to changes in mortality experience.
Insurance Expenses decreased by
commission expense.
55 --------------------------------------------------------------------------------
Selected financial information for the accident and health insurance product
line follows.
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2023 2022
Earned Premiums $ 5.9 $ 45.8
Net Investment Income - 0.7
Changes in Value of Alternative Energy Partnership Investments - (0.1)
Other Income 0.1 -
Total Revenues 6.0 46.4
Policyholders' Benefits and Incurred Losses and LAE 2.0 23.5
Insurance Expenses 2.0 20.8
Operating Income 2.0 2.1
Income Tax Expense (0.4) (0.4)
Total Product Line Net Operating Income $ 1.6 $ 1.7
Three Months Ended
Earned Premiums from accident and health insurance decreased by$39.9 million for the three months endedMarch 31, 2023 , compared to the same period in 2022. This is due primarily to the disposition of Reserve National inDecember 2022 . Policyholders' Benefits and Incurred Losses and LAE on accident and health insurance were$2.0 million for the three months endedMarch 31, 2023 , compared to$23.5 million for the same period in 2022. This is due primarily to the disposition of Reserve National inDecember 2022 .
Insurance Expenses decreased by
disposition of Reserve National in
56 --------------------------------------------------------------------------------
Selected financial information for the property insurance product line follows.
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2023 2022
Earned Premiums $ 11.2 $ 14.3
Net Investment Income 0.3 0.8
Changes in Value of Alternative Energy Partnership Investments - (0.3)
Total Revenues 11.5 14.8
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE 2.2 4.1
Catastrophe Losses and LAE 0.6 0.4
Prior Years:
Non-catastrophe Losses and LAE 0.8 0.6
Catastrophe Losses and LAE 0.2 0.9
Total Incurred Losses and LAE 3.8 6.0
Insurance Expenses 6.1 6.9
Operating Income 1.6 1.9
Income Tax Expense (0.3) (0.3)
Total Product Line Net Operating Income $ 1.3 $ 1.6
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio 19.6 % 28.7 %
Current Year Catastrophe Losses and LAE Ratio 5.4 2.8
Prior Years Non-catastrophe Losses and LAE Ratio 7.1 4.2
Prior Years Catastrophe Losses and LAE Ratio 1.8 6.3
Total Incurred Loss and LAE Ratio 33.9 % 42.0 %
Three Months Ended
Earned Premiums from property insurance decreased by$3.1 million for the three months endedMarch 31, 2023 , compared to the same period in 2022, due primarily to lower volume of property insurance products. Incurred losses and LAE on property insurance were$3.8 million , or 33.9% of earned premiums, for the three months endedMarch 31, 2023 , compared to$6.0 million , or 42.0% of earned premiums for the same period in 2022. Underlying losses and LAE were$2.2 million , or 19.6% of earned premiums for the three months endedMarch 31, 2023 , compared to$4.1 million , or 28.7% of earned premiums for the same period in 2022, a decrease of 9.1 percentage points due primarily to lower claim frequency and severity. Catastrophe losses and LAE (excluding loss reserve development) were$0.6 million for the three months endedMarch 31, 2023 , compared to$0.4 million for the same period in 2022. Catastrophe losses and LAE increased$0.2 million due primarily to both higher frequency of catastrophe claims and higher claim severity. Adverse loss and LAE reserve development was$1.0 million for the three months endedMarch 31, 2023 , compared to an adverse development of$1.5 million in the same period in 2022.
Insurance expenses decreased
2023
property insurance products.
57
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Investment Results
Net Investment Income
Net Investment Income for the three months endedMarch 31, 2023 and 2022 was: Three Months Ended Mar 31, Mar 31, (Dollars in Millions) 2023 2022 Investment Income: Interest on Fixed Income Securities$ 86.2 $ 68.7 Dividends on Equity Securities Excluding Alternative Investments 1.0 1.5 Alternative Investments: Equity Method Limited Liability Investments 1.1 13.3 Limited Liability Investments Included in Equity Securities 2.6 7.6 Total Alternative Investments 3.7 20.9 Short-term Investments 2.3 0.1 Loans to Policyholders 5.4 5.5 Real Estate 2.4 2.2 Company-Owned Life Insurance 8.8 8.3 Other 3.0 1.7 Total Investment Income 112.8 108.9 Investment Expenses: Real Estate 2.1 2.5 Other Investment Expenses 8.9 6.4 Total Investment Expenses 11.0 8.9 Net Investment Income$ 101.8 $ 100.0 Net Investment Income was$101.8 million and$100.0 million for the three months endedMarch 31, 2023 and 2022, respectively. Net Investment Income increased by$1.8 million in 2023 due primarily to higher rates and levels of investments inFixed Income Securities and higher rates on Short Term Investments offset by lower returns on Equity Method Limited Liability Investments and lower balances inEquity Securities . Income and distributions on Alternative Investments can fluctuate significantly between periods as they are influenced by operating performance of the underlying investments, changes in market or economic conditions or the timing of asset sales.
Total Comprehensive Investment Gains (Losses)
The components of Total Comprehensive Investment Gains (Losses) for the three
months ended
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2023 2022
Recognized in Condensed Consolidated Statements of Loss:
Income (Loss) from Change in Fair Value of Equity and Convertible
Securities $ 1.7 $ (28.2)
Gains on Sales 9.7 2.4
Losses on Sales (3.3) (0.9)
Gains on Hedging Activity - -
Impairment Gains (Losses) 2.1 (8.9)
10.2 (35.6) Recognized in Other Comprehensive Income (Loss) 179.8 (651.9) Total Comprehensive Investment Gains (Losses)
58 --------------------------------------------------------------------------------
Investment Results (Continued)
Total Comprehensive Investment Gains (Losses) were$190.0 million and$(687.5) million for the three months endedMarch 31, 2023 and 2022, respectively. Total Comprehensive Investment Losses decreased by$877.5 million primarily due to an a decrease in the Company's unrealized loss position on the fixed income bond portfolio.
Income (Loss) from Change in Fair Value of
The components of Income (Loss) from Change in Fair Value ofEquity and Convertible Securities for the three months endedMarch 31, 2023 and 2022 were: Three Months Ended Mar 31, Mar 31, (Dollars in Millions) 2023 2022 Preferred Stocks$ 0.1 $ (2.4) Common Stocks (0.5) 0.4 Other Equity Interests: Exchange Traded Funds 0.1 (30.9) Limited Liability Companies and Limited Partnerships 1.7 4.5 Total Other Equity Interests 1.8 (26.4) Income (Loss) from Change in Fair Value of Equity Securities 1.4 (28.4) Income from Change in Fair Value of Convertible Securities 0.3 0.2
Income (Loss) from Change in Fair Value of
Securities
$ 1.7 $ (28.2)
Net Realized Gains on Sales of Investment
The components of Net Realized Investment Gains for the three months ended
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2023 2022
Fixed Maturities:
Gains on Sales $ 1.1 $ 0.4
Losses on Sales (3.3) (0.8)
Equity Securities:
Gains on Sales - 2.0
Losses on Sales - (0.1)
Other:
Gains on Sales 8.6 -
Net Realized Investment Gains $ 6.4 $ 1.5
Gross Gains on Sales $ 9.7 $ 2.4
Gross Losses on Sales (3.3) (0.9)
Net Realized Investment Gains $ 6.4 $ 1.5
Impairment Gains (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 Loss in the period that the declines are
evaluated. Conversely, an increase in the fair value or disposal of an
investment with a previously established credit allowance will result in the
recognition of impairment gain reported in the Condensed Consolidated Statements
of Loss in the period.
59
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Investment Results (Continued)
The components of Impairment Gains (Losses) in the Condensed Consolidated
Statements of Loss for the three months ended
Three Months Ended
Mar 31, 2023 Mar 31, 2022
(Dollars in Millions) Amount Number of Issuers Amount Number of Issuers
Fixed Maturities $ 2.1 14 $ (8.9) 17
Equity Securities - - - -
Real Estate - - - -
Impairment Gains (Losses) $ 2.1 $ (8.9)
Investment Quality and Concentrations
The Company's fixed maturity investment portfolio is comprised primarily of high-grade corporate, municipal and agency bonds. AtMarch 31, 2023 , 95.9% of the Company's fixed maturity investment portfolio was rated investment-grade, which the Company defines as a security issued by a high quality obligor with at least a relatively stable credit profile and where it is highly likely that all contractual payments of principal and interest will timely occur and carry a rating from theNational Association of Insurance Commissioners ("NAIC") of 1 or 2. Securities with a rating of 1 or 2 from the NAIC typically are rated by one of more Nationally Recognized Statistical Rating Organizations and either have a rating ofAAA , AA, A or BBB fromStandard & Poor's ("S&P"); a rating of Aaa, Aa, A or Baa fromMoody's Investors Service ("Moody's"); or a rating ofAAA , AA, A or BBB from Fitch Ratings.
The following table summarizes the credit quality of the Company's fixed
maturity investment portfolio at
(Dollars in Millions) Mar 31, 2023 Dec 31, 2022
NAIC
Rating Rating Fair Value Percentage Fair Value Percentage
1 AAA, AA, A $ 5,179.6 72.0 % $ 4,896.4 71.0 %
2 BBB 1,718.7 23.9 1,687.4 24.5
3-4 BB, B 225.2 3.2 239.7 3.5
5-6 CCC or Lower 65.9 0.9 71.3 1.0
Total Investments in Fixed Maturities $ 7,189.4 100.0 % $ 6,894.8
100.0 %
Gross unrealized losses on the Company's investments in below-investment-grade
fixed maturities were
The following table summarizes the fair value of the Company's investments in
governmental fixed maturities at
Mar 31, 2023 Dec 31, 2022
Percentage Percentage
of Total of Total
(Dollars in Millions) Fair Value Investments Fair Value Investments
U.S. Government and Government Agencies and
Authorities $ 564.0 6.2 % $ 528.0 6.0 %
States and Political Subdivisions:
Revenue Bonds 1,374.1 15.1 1,324.3 15.1 States 144.8 1.6 143.8 1.6 Political Subdivisions 104.0 1.1 100.8 1.1 Foreign Governments 4.0 - 4.1 -
Total Investments in Governmental Fixed Maturities
24.0 %$ 2,101.0 23.8 % 60
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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 industry atMarch 31, 2023 andDecember 31, 2022 . Mar 31, 2023 Dec 31, 2022 Percentage Percentage of Total of Total (Dollars in Millions) Fair Value Investments Fair Value Investments Finance, Insurance and Real Estate$ 2,086.3 22.9 %$ 2,007.5 22.8 % Manufacturing 1,100.1 12.1 1,085.9 12.4 Transportation, Communication and Utilities 804.7 8.8 733.7 8.3 Services 640.7 7.0 602.4 6.9 Mining 182.2 2.0 173.3 2.0 Retail Trade 158.8 1.7 165.1 1.9 Construction 8.8 0.1 11.7 0.1 Other 16.9 0.2 14.2 0.2 Total Investments in Non-governmental Fixed Maturities$ 4,998.5 54.8 %$ 4,793.8 54.6 % The following table summarizes the fair value of the Company's investments in non-governmental fixed maturities by range of amount invested atMarch 31, 2023 . (Dollars in Millions) Number of Issues Aggregate Fair Value Below$5 740 $ 1,480.1$5 -$10 187 1,407.7$10 -$20 109 1,478.8$20 -$30 20 482.3 Greater Than$30 4 149.6 Total 1,060 $ 4,998.5 The Company's short-term investments primarily consist of money market funds and short term bonds. AtMarch 31, 2023 , the Company had$186.9 million invested in money market funds which primarily invest inU.S. Treasury securities and$91.5 million invested inU.S. treasury bills and short-term bonds. 61
--------------------------------------------------------------------------------
Investment Quality and Concentrations (Continued)
The following table summarizes the fair value of the Company's ten largest investment exposures in a single issuer, excluding investments inU.S. Government and Government Agencies and Authorities and Short-term Investments, atMarch 31, 2023 : Percentage Fair of Total (Dollars in Millions) Value Investments Fixed Maturities: States including their Political Subdivisions: Texas$ 143.6 1.6 % California 133.1 1.5 Michigan 93.6 1.0 New York 89.5 1.0 Georgia 80.3 0.9 Louisiana 65.5 0.7 Florida 59.2 0.7 Pennsylvania 59.2 0.7 Colorado 52.9 0.6 Massachusetts 49.2 0.5 Total$ 826.1 9.2 % 62
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Investments in Limited Liability Companies and Limited Partnerships
The Company owns investments in various limited liability investment companies and limited partnerships that primarily invest in mezzanine debt, distressed debt, real estate and senior debt. The Company's investments in these limited liability investment companies and limited partnerships are reported either as Equity Method Limited Liability Investments, Other Equity Interests and included inEquity Securities at Fair Value, orEquity Securities at Modified Cost depending on the accounting method used to report the investment. Additional information pertaining to these investments atMarch 31, 2023 andDecember 31, 2022 is presented below. Unfunded Commitment Reported Value Mar 31, Mar 31, Dec 31, (Dollars in Millions) 2023 2023 2022 Reported as Equity Method Limited Liability Investments: Mezzanine Debt$ 53.3 $ 117.3 $ 114.3 Senior Debt 40.7 21.8 21.6 Distressed Debt - 8.3 9.4 Secondary Transactions 1.7 9.1 9.3 Leveraged Buyout 0.7 9.2 8.9 Growth Equity - 1.2 1.2 Real Estate - 43.3 43.3 Hedge Fund - 0.1 0.5 Other - 8.4 8.5 Total Equity Method Limited Liability Investments 96.4 218.7 217.0 Alternative Energy Partnership Investments - 17.0 16.3 Reported as Other Equity Interests at Fair Value: Mezzanine Debt 62.4 111.4 106.0 Senior Debt 6.0 21.9 21.9 Distressed Debt 13.0 12.7 12.5 Secondary Transactions 4.3 3.1 3.5 Hedge Funds - 17.7 18.1 Leveraged Buyout 7.9 22.3 21.6 Growth Equity 6.7 6.3 5.4 Real Estate 0.2 0.2 - Other - - 0.1 Total Reported as Other Equity Interests at Fair Value 100.5 195.6 189.1
Reported as
Other - 8.3 8.3 Total Reported as Equity Securities at Modified Cost - 8.3 8.3
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.
63
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Insurance, Interest, and Other Expenses
Expenses for the three months ended
Three Months Ended
Mar 31, Mar 31,
(Dollars in Millions) 2023 2022
Insurance Expenses:
Commissions $ 166.9 $ 191.9
General Expenses 94.2 87.1
Taxes, Licenses and Fees 23.6 25.4
Total Costs Incurred 284.7 304.4
Net Policy Acquisition Costs Deferred (15.9) (1.7)
Amortization of Value of Business Acquired ("VOBA") 0.5 2.1
Insurance Expenses 269.3 304.8
Loss from Early Extinguishment of Debt - 3.7
Interest and Other Expenses:
Interest Expense 14.1 12.7
Other Expenses:
Acquisition and Disposition Related Transaction, Integration, Restructuring
and Other Costs 29.1 4.7
Other 34.2 36.7
Other Expenses 63.3 41.4
Interest and Other Expenses 77.4 54.1
Total Expenses $ 346.7 $ 362.6
Insurance Expenses
Insurance Expenses decreased by
business being written.
Loss from Early Extinguishment of Debt
Loss from Early Extinguishment of Debt decreased by
months ended
redemption of the 2022 Senior Notes.
Interest and Other Expenses
Interest expense increased by$1.4 million for the three months endedMarch 31, 2023 , compared to the same period in 2022, primarily due to the addition of the 2032 Senior Notes and the 2062 Junior Debentures.
Other expenses increased by
2023
restructuring costs of the Company's operations.
Income Taxes
The federal corporate statutory income tax rate was 21% for the three months endedMarch 31, 2023 andMarch 31, 2022 . 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 and general business tax credits, (4) a permanent difference between the amount of long-term equity-based compensation expense recognized under GAAP and the amount deductible in the computation of Federal taxable income and (5) a permanent difference associated with nondeductible executive compensation. The Inflation Reduction Act (H.R. 5376 or the "Law") was signed into law onAugust 16, 2022 , and became 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. The Company has evaluated the provisions of the Law and does not expect a material impact. The Company will continue to monitor guidance as it is released by the Internal Revenue Service and United States Treasury. 64 --------------------------------------------------------------------------------
Income Taxes (Continued)
Tax-exempt investment income and dividends received deductions collectively were$7.7 million for the three months endedMarch 31, 2023 , compared to$6.3 million for the same period in 2022. The nontaxable increase in cash surrender value onCompany-Owned Life Insurance was$8.9 million for the three months endedMarch 31, 2023 , compared to$8.3 million for the same period in 2022. The Company realized net investment tax credit recaptures of$0.1 million for the three months endedMarch 31, 2023 , compared to net investment tax credits of$3.5 million for the same period in 2022. The amount of expense recognized for long-term equity-based compensation expense under GAAP did not differ from the amount that would be deductible under the IRC for the three months endedMarch 31, 2023 , compared to$3.6 million higher for the same period in 2022. The amount of nondeductible executive compensation was$4.9 million for the three months endedMarch 31, 2023 , compared to$3.1 million for the same period in 2022.
Recently Issued Accounting Pronouncements
The Company has adopted all recently issued accounting pronouncements with
effective dates prior to
InAugust 2018 , the FASB issued ASU 2018-12. The Company's adoption of LDTI was effectiveJanuary 1, 2023 under the modified retrospective transition method. See Note 1, "Basis of Presentation and Accounting Policies," to the Condensed Consolidated Financial Statements for more information.
Other than discussed above, there were no adoptions of such accounting
pronouncements during the three months ended
impact on the Company's Condensed Consolidated Financial Statements.
Liquidity and Capital Resources
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 and additional$200.0 million for a total of maximum capacity of$800.0 million . Financial covenants within the agreement limit the Company from accessing the maximum capacity. The amount available as ofMarch 31, 2023 was$520.0 million . There were no outstanding borrowings under the credit agreement at eitherMarch 31, 2023 orDecember 31, 2022 . Long-term Debt The Company designates debt obligations as either short-term or long-term based on maturity date at issuance, or in the case of the 2022 Senior Notes, based on the date of assumption. Total amortized cost of Long-term Debt outstanding atMarch 31, 2023 andDecember 31, 2022 was: Mar 31, Dec 31, (Dollars in Millions) 2023 2022 Senior Notes: 4.350% Senior Notes due February 15, 2025$ 449.4 $ 449.3 2.400% Senior Notes due September 30, 2030 396.7 396.6 3.800% Senior Notes due February 23, 2032 395.6 395.5 5.875% Fixed-Rate Reset Junior Subordinated Debentures Due 2062 145.8 145.5 Total Long-term Debt Outstanding
See Note 16, "Debt," to the Consolidated Financial Statements for more
information regarding the Company's long-term debt.
Federal Home Loan Bank Agreements
Kemper's subsidiaries,United Insurance Company of America ("United Insurance "),Trinity Universal Insurance Company ("Trinity"), andAmerican Access Casualty Company ("AAC") are members of the Federal Home Loan Banks ("FHLBs") ofChicago ,Dallas andChicago respectively.Alliance United Insurance Company ("Alliance") was a member of the FHLB ofSan Francisco until it surrendered allCalifornia licenses onJanuary 30, 2023 and ceased to exist as an insurance company.American Access Casualty Company became a member of the FHLB ofChicago inMay 2022 . United Insurance and Trinity became members of the FHLBs ofChicago andDallas , respectively, in 2013. Under their memberships, United Insurance, Trinity and AAC may borrow through the advance program of their respective FHLB. As a requirement of membership in the 65 --------------------------------------------------------------------------------
Liquidity and Capital Resources (Continued)
FHLB, United Insurance, Trinity and AAC 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 in Other Investments. The carrying value of FHLB ofChicago common stock was$17.5 million atMarch 31, 2023 andDecember 31, 2022 , respectively. The carrying value of FHLB ofDallas common stock was$3.5 million and$3.4 million atMarch 31, 2023 andDecember 31, 2022 , respectively. The carrying value of FHLB ofSan Francisco common stock was$1.4 million atDecember 31, 2022 . 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 three months of 2023, United Insurance received advances of$89.1 million from the FHLB ofChicago and made repayments of$89.1 million . United Insurance had outstanding advances from the FHLB ofChicago totaling$601.0 million atMarch 31, 2023 . 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$772.9 million atMarch 31, 2023 . 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 15, "Policyholder Obligations," to the Condensed Consolidated Financial Statements for additional information about the United Insurance advances and related funding agreements.
Common Stock Repurchases
OnMay 6, 2020 , Kemper's Board of Directors authorized the repurchase of up to an additional$200.0 million of Kemper's common stock, in addition to$133.3 million remaining under theAugust 6, 2014 authorization, bringing the remaining share repurchase authorization to approximately$333.3 million . As ofMarch 31, 2023 the remaining share repurchase authorization under the repurchase program was$171.6 million . The amount and timing of any future share repurchases under the authorization will depend on a variety of factors, including market conditions, the Company's financial condition, results of operations, available liquidity, particular circumstances and other considerations.
During the three months ended
any shares of its common stock.
Dividends to Shareholders
Kemper paid a quarterly dividend to shareholders of$0.31 per common share in the first quarter of 2023. Dividends and dividend equivalents paid were$19.4 million for the three months endedMarch 31, 2023 .
Subsidiary Dividends
Various insurance laws restrict the ability of Kemper's insurance subsidiaries to pay dividends without regulatory approval. Such insurance laws generally restrict the amount of dividends paid in an annual period to the greater of statutory net income from the previous year or 10% of statutory capital and surplus. Kemper's insurance subsidiaries collectively did not pay any dividends to Kemper during the first three months of 2023. Kemper estimates that its direct insurance subsidiaries would be able to pay approximately$95.7 million in additional dividends to Kemper during the remainder of 2023 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 of
contributions from Kemper. The primary uses of funds are the payment of
policyholder benefits under life insurance contracts, claims under
66 --------------------------------------------------------------------------------
Liquidity and Capital Resources (Continued)
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 of
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 be sold to fund payments, which could result in investment gains or losses. Management believes that its property and casualty insurance subsidiaries maintain adequate levels of liquidity in the event that they were to experience several future catastrophic events over a relatively short period of time.
Information about the Company's cash flows for three months ended
and 2022 is presented below.
March 31, March 31,
DOLLARS IN MILLIONS 2023 2022
Net Cash Provided by (Used in) Operating Activities $ 5.2 $ (18.2)
Net Cash Used in Investing Activities (138.2) (225.1)
Net Cash (Used in) Provided by Financing Activities (18.8) 392.4
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 provided in Operating Activities was$5.2 million for the three months endedMarch 31, 2023 , compared to net cash used of$18.2 million for the same period in 2022, an increase of$23.4 million . Cash from operating activities increased primarily due to a$124.7 million federal income tax refund that was received in first quarter 2023 and mostly offset by paid losses within the P&C business due to an increase in frequency of claims.
Cash Used in Investing Activities
Net cash used in Investing Activities for the three months endedMarch 31, 2023 was$138.2 million , compared to cash used of$225.1 million for the same period in 2022, a decrease in cash used of$86.9 million . This was primarily due to a decrease in purchases ofCorporate-Owned Life Insurance .
Cash (Used in) Provided by Financing Activities
Net cash used in Financing Activities for the three months endedMarch 31, 2023 was$18.8 million , compared to cash provided of$392.4 million for the same period in 2022, decrease of$411.2 million . This was primarily due to a decrease in debt raising activities in 2023.
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 valuation of liability for
future policyholder benefits, the assessment of recoverability of goodwill, the
valuation of pension benefit obligations, and the recoverability of deferred tax
assets. The Company's critical accounting policies are described in the MD&A
included in the 2022 Annual Report. There have been no material changes to the
information disclosed in the 2022 Annual Report with respect to these critical
accounting
67
--------------------------------------------------------------------------------
Critical Accounting Estimates (Continued)
estimates and the Company's significant accounting policies, other than the
addition of significant accounting policies related to the adoption of ASU
2018-12 included in Note 1, "Basis of Presentation and Accounting Policies" to
the Condensed Consolidated Financial Statements.
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