# KEMPER Corp (KMPR) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from KEMPER Corp's 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/860748/000086074822000036/kmpr-20211231.htm Accession: 0000860748-22-000036 Filing date: 2022-02-10 Report date: 2021-12-31 Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference. Confidence: high Company profile: /company/KMPR/ All MD&A years: /company/KMPR/mda/ Next year: /company/KMPR/mda/fy2022/ (FY 2022) Management’s Discussion and Analysis of Financial Condition and Results of Operations [[GREPCENT_TABLE]] [["Summary of Results","31"],["Catastrophes","32"],["Loss and LAE Reserve Development","34"],["Non-GAAP Financial Measures","34"],["Specialty Property & Casualty Insurance","36"],["Preferred Property & Casualty Insurance","40"],["Life & Health Insurance","45"],["Investment Results","49"],["Investment Quality and Concentrations","52"],["Investments in Limited Liability Companies and Limited Partnerships","55"],["Insurance, Interest and Other Expenses","56"],["Income Taxes","56"],["Liquidity and Capital Resources","57"],["Contractual Obligations","60"],["Critical Accounting Estimates","60"],["Recently Issued Accounting Pronouncements","65"]] [[/GREPCENT_TABLE]] 30 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations SUMMARY OF RESULTS Net Loss was $120.5 million ($(1.87) per unrestricted common share) for the year ended December 31, 2021, compared to Net Income $409.9 million ($6.24 per unrestricted common share) for the year ended December 31, 2020. Beginning in March 2020, the global pandemic associated with COVID-19 and related economic conditions began to impact the Company’s results of operations. The numbers referenced in the following paragraphs are estimates. The actual impacts could ultimately differ from the stated estimates, although the Company believes any difference would likely not be material. For the year ended December 31, 2021, the Company estimates that its net results were negatively impacted by $485 million related to the effects of the COVID-19 pandemic and related economic conditions. The impact to net results was primarily related to underwriting losses in the P&C business attributable to rising loss costs fueled by higher inflation, as well as pandemic-related auto industry shortages of supplies such as chips, high demand for used cars, and higher labor costs. Additionally, the Life & Health insurance segment continued to experience excess pandemic-related mortality. For the year ended December 31, 2020, the Company estimated an improvement to net income of $70 million related to the effects of the COVID-19 pandemic and related economic conditions. The increase to net income was primarily attributed to improved underwriting results driven by lower frequency in the auto business of the P&C segments as a significant reduction in miles driven occurred, partially offset by premium credits to policyholders in the P&C segments and excess mortality in the Life & Health Insurance segment. For further discussion regarding the potential impacts of COVID-19 and related economic conditions on the Company, see “Caution Regarding Forward-Looking Statements” beginning on page 1 and Item 1A, Risk Factors, of Part 1 of this Annual Report on Form 10-K. A reconciliation of Net Income (Loss) to Adjusted Consolidated Net Operating Income (Loss) (a non-GAAP financial measure) for the years ended December 31, 2021, 2020 and 2019 is presented below. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","2021","","2020","","Increase (Decrease) in Income from 2020 to 2021","","2019","","Increase (Decrease) in Income from 2019 to 2020"],["Net Income (Loss)","","$","(120.5)","","","$","409.9","","","$","(530.4)","","","$","531.1","","","$","(121.2)"],["Less:"],["Income from Change in Fair Value of Equity and Convertible Securities","","90.5","","","57.0","","","33.5","","","109.7","","","(52.7)"],["Net Realized Gains on Sales of Investments","","51.2","","","30.1","","","21.1","","","33.1","","","(3.0)"],["Net Impairment Losses Recognized in Earnings","","(8.7)","","","(15.4)","","","6.7","","","(10.9)","","","(4.5)"],["Acquisition Related Transaction, Integration and Other Costs","","(34.7)","","","(50.0)","","","15.3","","","(14.5)","","","(35.5)"],["Debt Extinguishment, Pension and Other Charges","","\u2014","","","(50.6)","","","50.6","","","(4.6)","","","(46.0)"],["Adjusted Consolidated Net Operating Income (Loss)","","$","(218.8)","","","$","438.8","","","$","(657.6)","","","$","418.3","","","$","20.5"],["Components of Adjusted Consolidated Net Operating Income (Loss):"],["Segment Net Operating Income (Loss):"],["Specialty Property & Casualty Insurance","","$","(196.1)","","","$","337.9","","","$","(534.0)","","","$","283.1","","","$","54.8"],["Preferred Property & Casualty Insurance","","(12.5)","","","3.5","","","(16.0)","","","41.9","","","(38.4)"],["Life & Health Insurance","","28.2","","","60.0","","","(31.8)","","","98.7","","","(38.7)"],["Segment Net Operating Income (Loss)","","(180.4)","","","401.4","","","(581.8)","","","423.7","","","(22.3)"],["Corporate and Other Net Operating Income (Loss) From:"],["Partial Satisfaction of Judgment","","\u2014","","","70.6","","","(70.6)","","","15.9","","","54.7"],["Other","","(38.4)","","","(33.2)","","","(5.2)","","","(21.3)","","","(11.9)"],["Corporate and Other Net Operating Income (Loss)","","(38.4)","","","37.4","","","(75.8)","","","(5.4)","","","42.8"],["Adjusted Consolidated Net Operating Income (Loss)","","$","(218.8)","","","$","438.8","","","$","(657.6)","","","418.3","","","$","20.5"]] [[/GREPCENT_TABLE]] 31 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) SUMMARY OF RESULTS (Continued) Net Income (Loss) 2021 Compared with 2020 Net Income decreased by $530.4 million in 2021, compared to 2020, due primarily to lower Adjusted Consolidated Net Operating Income, partially offset by income from change in fair value of equity and convertible securities. Adjusted Consolidated Net Operating Income (Loss) decreased by $657.6 million in 2021, compared to 2020, due primarily to lower Specialty Property & Casualty Segment Insurance Net Operating Income, Corporate and Other Net Operating Income, Life & Health Insurance Segment Net Operating Income, and Preferred Property & Casualty Insurance Segment Net Operating Income. 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 (Loss) decreased due primarily to a gain recognized in 2020 for the satisfaction of the remaining balance of a final judgment received by the Company in connection with an arbitration award against Computer Sciences Corporation (the “CSC Judgment”). The Company’s investment results were favorable in 2021, compared to 2020, primarily driven by a $33.5 million after-tax increase from the change in fair value of the equity and convertible securities, $21.1 million after-tax increase from net realized gains on sales of investments, and $6.7 million after-tax of decreased impairment losses. See MD&A, “Investment Results,” MD&A, “Income Taxes,” and Note 24, “Contingencies.” to the Consolidated Financial Statements for additional discussion. Revenues 2021 Compared with 2020 Earned Premiums were $5,253.7 million in 2021, compared to $4,672.2 million in 2020, an increase of $581.5 million. Earned Premiums in the Specialty Property & Casualty Insurance segment increased by $613.2 million for the year ended December 31, 2021. Earned Premiums in the Preferred Property & Casualty Insurance segment decreased by $36.5 million for the year ended December 31, 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 increased by $79.1 million in 2021 due primarily to an increase in return from Alternative Investments, higher levels of investments in fixed income securities, and higher levels of investments and rate on Company-Owned Life Insurance, partially offset by lower yields on fixed income securities. Loss from the change in value of Alternative Energy Partnership Investments was $61.2 million for the year ended December 31, 2021. Tax benefits related to the Alternative Energy Partnership Investments were $79.0 million, resulting in net income attributable to Alternative Energy Partnership Investments of $17.8 million for the year ended December 31, 2021. Other Income decreased by $89.8 million for the year ended December 31, 2021, compared to the same period in 2020. Other Income for the year ended December 31, 2020 included a gain of $89.4 million related to the partial satisfaction of a final judgment against Computer Sciences Corporation. Net Realized Gains on Sales of Investments were $64.8 million in 2021, compared to $38.1 million in 2020. Impairment Losses were $11.0 million in 2021, compared to $19.5 million for the same period in 2020. See MD&A, “Investment Results,” under the sub-captions “Net Realized Gains on Sales of Investments” and “Impairment Losses” for additional discussion. The Company cannot predict if or when similar investment gains or losses may occur in the future. CATASTROPHES Catastrophes and natural disasters are inherent risks of the property and casualty insurance business. These catastrophic events and natural disasters include, without limitation, hurricanes, tornadoes, earthquakes, hailstorms, wildfires, high winds and winter storms. Such events result in insured losses that are, and will continue to be, a material factor in the results of operations and financial position of the Company’s property and casualty insurance companies. Further, because the level of these insured losses occurring in any one year cannot be accurately predicted, these losses may contribute to material year-to-year fluctuations in the results of operations and financial position of these companies. Specific types of catastrophic events are more likely to occur at certain times within the year than others. This factor adds an element of seasonality to property and casualty 32 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) CATASTROPHES (Continued) insurance claims. The Company has adopted the industry-wide catastrophe classifications of storms and other events promulgated by ISO to track and report losses related to catastrophes. ISO classifies a disaster as a catastrophe when the event causes $25.0 million or more in direct insured losses to property and affects a significant number of policyholders and insurers. ISO-classified catastrophes are assigned a unique serial number recognized throughout the insurance industry. The number of ISO-classified catastrophic events and catastrophe losses and LAE, net of reinsurance recoveries, (excluding loss and LAE reserve development) by range of loss and business segment for the years ended December 31, 2021, 2020 and 2019 are presented below. [[GREPCENT_TABLE]] [["","","Year Ended"],["","","Dec 31, 2021","","Dec 31, 2020","","Dec 31, 2019"],["DOLLARS IN MILLIONS","","Number of Events","","Losses and LAE","","Number of Events","","Losses and LAE","","Number of Events","","Losses and LAE"],["Range of Losses and LAE Per Event:"],["Below $5","","65","","","$","56.1","","","60","","","$","51.2","","","56","","","$","42.4"],["$5 - $10","","2","","","16.5","","","5","","","40.2","","","3","","","20.8"],["$10 - $15","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","1","","","14.0"],["$15 - $20","","2","","","35.2","","","1","","","15.3","","","\u2014","","","\u2014"],["$20 - $25","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Greater Than $25","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total","","69","","","$","107.8","","","66","","","$","106.7","","","60","","","$","77.2"],["Specialty Property & Casualty Insurance","","","","15.7","","","","","12.3","","","","","11.1"],["Preferred Property & Casualty Insurance","","","","79.1","","","","","82.0","","","","","63.0"],["Life & Health Insurance","","","","13.0","","","","","12.4","","","","","3.1"],["Total Catastrophe Losses and LAE","","","","$","107.8","","","","","$","106.7","","","","","$","77.2"]] [[/GREPCENT_TABLE]] Catastrophe Reinsurance The Company primarily manages its exposure to catastrophes and other natural disasters through a combination of geographical diversification, restrictions on the amount and location of new business production in such regions, modifications of, and/or limitations to coverages and deductibles for certain perils in such regions and a catastrophe reinsurance program for the Company’s Specialty Property & Casualty Insurance and Preferred Property & Casualty Insurance segments. Coverage under the catastrophe reinsurance program is provided in various contracts and layers. The Company’s Specialty Property & Casualty Insurance and Preferred Property & Casualty Insurance segments also purchase reinsurance from the FHCF for hurricane losses in Florida at retentions lower than its catastrophe reinsurance program. The Life & Health Insurance segment also purchases reinsurance from the FHCF for hurricane losses in Florida and is party to the Property & Casualty catastrophe reinsurance program for its Kemper Home Service companies. The Company had no material recoveries under its catastrophe reinsurance treaties for the years ended December 31, 2021 and 2020. See the “Reinsurance” subsection of the “Property and Casualty Insurance Business” and “Life and Health Insurance Business” sections of Item 1(c), “Description of Business,” and Note 21, “Catastrophe Reinsurance,” to the Consolidated Financial Statements for additional information on the Company’s reinsurance programs. 33 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) LOSS AND LAE RESERVE DEVELOPMENT Increases (decreases) in the Company’s property and casualty loss and LAE reserves for the years ended December 31, 2021, 2020 and 2019 to recognize adverse (favorable) loss and LAE reserve development from prior accident years in continuing operations, hereinafter also referred to as “reserve development” in the discussion of segment results, are presented below. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","2021","","2020","","2019"],["Increase (Decrease) in Total Loss and LAE Reserves Related to Prior Years:"],["Non-catastrophe","","$","112.1","","","$","36.2","","","$","(54.0)"],["Catastrophe","","(5.4)","","","0.2","","","(17.1)"],["Increase (Decrease) in Total Loss and LAE Reserves Related to Prior Years","","$","106.7","","","$","36.4","","","$","(71.1)"]] [[/GREPCENT_TABLE]] See MD&A, “Specialty Property & Casualty Insurance,” MD&A, “Preferred Property & Casualty Insurance,” MD&A, “Life & Health Insurance,” and Note 6, “Property and Casualty Insurance Reserves,” to the Consolidated Financial Statements for additional information on the Company’s reserve development. See MD&A, “Critical Accounting Estimates,” of this 2021 Annual Report for additional information pertaining to the Company’s process of estimating property and casualty insurance reserves for losses and LAE, and the estimated variability thereof, development of property and casualty insurance losses and LAE, and a discussion of some of the variables that may impact them. NON-GAAP FINANCIAL MEASURES Pursuant to the rules and regulations of the SEC, the Company is required to file consolidated financial statements prepared in accordance with the accounting principles generally accepted in the United States (“GAAP”). The Company is permitted to include non-GAAP financial measures in its filings provided that they are defined along with an explanation of their usefulness to investors, are no more prominent than the comparable GAAP financial measures and are reconciled to such GAAP financial measures. These 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. 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’s Property & 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 Equity and Convertible Securities; (ii) Net Realized Gains or Losses on Sales of Investments; 34 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) NON-GAAP FINANCIAL MEASURES (Continued) (iii) Impairment Losses; (iv) Acquisition Related Transaction, Integration and Other Costs; (v) Debt Extinguishment, Pension and Other Charges; and (vi) Significant non-recurring or infrequent items that may not be indicative of ongoing operations Significant non-recurring items are excluded when (a) the nature of the charge or gain is such that it is reasonably unlikely to recur within two years, and (b) there has been no similar charge or gain within the prior two years. The most directly comparable GAAP financial measure is Net Income (Loss). There were no applicable significant non-recurring items that the Company excluded from the calculation of Adjusted Consolidated Net Operating Income for the years ended December 31, 2021, 2020 or 2019. The Company believes that Adjusted Consolidated Net Operating Income provides investors with a valuable measure of its ongoing performance because it reveals underlying operational performance trends that otherwise might be less apparent if the items were not excluded. Income (Loss) from Change in Fair Value of Equity and Convertible Securities, Net Realized Gains or Losses on Sales of Investments and Impairment Losses related to investments included in the Company’s results may vary significantly between periods and are generally driven by business decisions and external economic developments such as capital market conditions that impact the values of the Company’s investments, the timing of which is unrelated to the insurance underwriting process. Acquisition Related Transaction and Integration Costs may vary significantly between periods and are generally driven by the timing of acquisitions and business decisions which are unrelated to the insurance underwriting process. Debt Extinguishment, Pension and Other Charges relate to (i) loss from early extinguishment of debt, which is driven by the Company’s financing and refinancing decisions and capital needs, as well as external economic developments such as debt market conditions, the timing of which is unrelated to the insurance underwriting process; (ii) settlement of pension plan obligations which are business decisions made by the Company, the timing of which is unrelated to the underwriting process; and (iii) other charges that are non-standard, not part of the ordinary course of business, and unrelated to the insurance underwriting process. Significant non-recurring items are excluded because, by their nature, they are not indicative of the Company’s business or economic trends. The preceding non-GAAP financial measures should not be considered a substitute for the comparable GAAP financial measures, as they do not fully recognize the overall profitability of the Company’s businesses. 35 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) SPECIALTY PROPERTY & CASUALTY INSURANCE Selected financial information for the Specialty Property & Casualty Insurance segment is presented below. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","2021","","2020","","2019"],["Net Premiums Written","","$","4,057.3","","","$","3,435.5","","","$","3,211.3"],["Earned Premiums","","$","3,948.5","","","$","3,335.3","","","$","3,078.4"],["Net Investment Income","","152.5","","","114.1","","","107.5"],["Change in Value of Alternative Energy Partnership Investments","","(29.0)","","","\u2014","","","\u2014"],["Other Income","","4.1","","","1.8","","","7.0"],["Total Revenues","","4,076.1","","","3,451.2","","","3,192.9"],["Incurred Losses and LAE related to:"],["Current Year:"],["Non-catastrophe Losses and LAE","","3,480.3","","","2,350.8","","","2,302.4"],["Catastrophe Losses and LAE","","15.7","","","12.3","","","11.1"],["Prior Years:"],["Non-catastrophe Losses and LAE","","97.4","","","15.1","","","(35.1)"],["Catastrophe Losses and LAE","","0.3","","","0.2","","","0.5"],["Total Incurred Losses and LAE","","3,593.7","","","2,378.4","","","2,278.9"],["Insurance Expenses","","774.5","","","651.9","","","555.6"],["Other Expenses","","\u2014","","","\u2014","","","2.5"],["Operating Income (Loss)","","(292.1)","","","420.9","","","355.9"],["Income Tax Benefit (Expense)","","96.0","","","(83.0)","","","(72.8)"],["Segment Net Operating Income (Loss)","","$","(196.1)","","","$","337.9","","","$","283.1"],["Ratios Based On Earned Premiums"],["Current Year Non-catastrophe Losses and LAE Ratio","","88.1","%","","70.4","%","","74.7","%"],["Current Year Catastrophe Losses and LAE Ratio","","0.4","","","0.4","","","0.4"],["Prior Years Non-catastrophe Losses and LAE Ratio","","2.5","","","0.5","","","(1.1)"],["Prior Years Catastrophe Losses and LAE Ratio","","\u2014","","","\u2014","","","\u2014"],["Total Incurred Loss and LAE Ratio","","91.0","","","71.3","","","74.0"],["Insurance Expense Ratio","","19.6","","","19.5","","","18.0"],["Combined Ratio","","110.6","%","","90.8","%","","92.0","%"],["Underlying Combined Ratio"],["Current Year Non-catastrophe Losses and LAE Ratio","","88.1","%","","70.4","%","","74.7","%"],["Insurance Expense Ratio","","19.6","","","19.5","","","18.0"],["Underlying Combined Ratio","","107.7","%","","89.9","%","","92.7","%"],["Non-GAAP Measure Reconciliation"],["Combined Ratio","","110.6","%","","90.8","%","","92.0","%"],["Less:"],["Current Year Catastrophe Losses and LAE Ratio","","0.4","","","0.4","","","0.4"],["Prior Years Non-catastrophe Losses and LAE Ratio","","2.5","","","0.5","","","(1.1)"],["Prior Years Catastrophe Losses and LAE Ratio","","\u2014","","","\u2014","","","\u2014"],["Underlying Combined Ratio","","107.7","%","","89.9","%","","92.7","%"]] [[/GREPCENT_TABLE]] 36 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) SPECIALTY PROPERTY & CASUALTY INSURANCE (Continued) INSURANCE RESERVES [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","Dec 31, 2021","","Dec 31, 2020"],["Insurance Reserves:"],["Non-Standard Automobile","","$","1,985.8","","","$","1,308.3"],["Commercial Automobile","","333.9","","","236.5"],["Total Insurance Reserves","","$","2,319.7","","","$","1,544.8"],["Insurance Reserves:"],["Loss and Allocated LAE Reserves:"],["Case and Allocated LAE","","$","1,157.9","","","$","744.6"],["Incurred But Not Reported","","953.0","","","653.6"],["Total Loss and LAE Reserves","","2,110.9","","","1,398.2"],["Unallocated LAE Reserves","","208.8","","","146.6"],["Total Insurance Reserves","","$","2,319.7","","","$","1,544.8"]] [[/GREPCENT_TABLE]] See MD&A, “Critical Accounting Estimates,” under the caption “Property and Casualty Insurance Reserves for Losses and Loss Adjustment Expenses” 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 2021 Compared with 2020 The Specialty Property & Casualty Insurance segment reported Segment Net Operating Loss of $196.1 million for the year ended December 31, 2021, compared to Net Operating Income of $337.9 million in 2020. Segment net operating results decreased by $534.0 million due primarily to an increase in underlying losses and LAE as a percentage of earned premiums related to higher claim frequency and severity trends and adverse loss reserve development, partially offset by higher net investment income. Underlying losses and LAE exclude the impact of catastrophes and loss and LAE reserve development. Earned Premiums in the Specialty Property & Casualty Insurance segment increased by $613.2 million in 2021, compared to 2020 driven by the acquisition of AAC, COVID-19 related premium credits in the prior period, and higher volume. Volumes were higher in both the Private Passenger Auto and Commercial Automobile product lines. Net Investment Income in the Specialty Property & Casualty Insurance segment increased by $38.4 million in 2021, compared to 2020, due primarily to an increase in return from Alternative Investments, higher levels of investments in fixed income securities, and higher levels of investments and rate on Company-Owned Life Insurance, partially offset by lower yields on fixed income securities. Loss related to Changes in Value of Alternative Energy Partnership Investments was $29.0 million for the year ended December 31, 2021. Tax benefits related to the Alternative Energy Partnership Investments were $37.4 million, resulting in net income attributable to Alternative Energy Partnership Investments of $8.4 million for the year ended December 31, 2021. Underlying losses and LAE as a percentage of earned premiums were 88.1% in 2021, a deterioration of 17.7 percentage points, compared to 2020, due primarily to higher claim frequency and severity trends. Frequency trends increased as a result of driving activity returning to pre-pandemic levels. Severity trends increased due to rising inflation and supply chain constraints. Underlying losses and LAE exclude the impact of catastrophes and loss and LAE reserve development. Adverse loss and LAE reserve development (including catastrophe reserve development) was $97.7 million in 2021, compared to $15.3 million in 37 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) SPECIALTY PROPERTY & CASUALTY INSURANCE (Continued) 2020. Adverse loss and LAE reserve development in 2021 was largely driven by legal developments and increased severity in personal injury protection coverage in Florida and other liability coverages. Catastrophe losses and LAE (excluding reserve development) were $15.7 million in 2021, compared to $12.3 million in 2020, an increase of $3.4 million. Insurance expenses were $774.5 million, or 19.6% of earned premiums, in 2021, compared to $651.9 million, or 19.5% of earned premiums, in 2020. Insurance expenses as a percentage of earned premium in 2021 included the amortization of intangible assets arising from the acquisition of AAC, which was offset by lower earned premium in 2020 due primarily to premium credits. The Specialty Property & Casualty Insurance segment’s effective income tax rate differs from the federal statutory income tax rate due primarily to investment tax credits, tax-exempt investment income and dividends received deductions. Specialty Personal Automobile Insurance Selected financial information for the specialty personal automobile insurance product line for the years ended December 31, 2021, 2020 and 2019 is presented below. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","","","","","2021","","","","","","2020","","2019"],["Net Premiums Written","","","","","","$","3,587.2","","","","","","","$","3,086.5","","","$","2,941.1"],["Earned Premiums","","","","","","$","3,533.7","","","","","","","$","3,031.3","","","$","2,825.6"],["Incurred Losses and LAE related to:"],["Current Year:"],["Non-catastrophe Losses and LAE","","","","","","$","3,173.9","","","","","","","$","2,160.9","","","$","2,131.5"],["Catastrophe Losses and LAE","","","","","","14.4","","","","","","","11.6","","","9.9"],["Prior Years:"],["Non-catastrophe Losses and LAE","","","","","","85.0","","","","","","","28.0","","","(24.3)"],["Catastrophe Losses and LAE","","","","","","0.3","","","","","","","0.2","","","0.5"],["Total Incurred Losses and LAE","","","","","","$","3,273.6","","","","","","","$","2,200.7","","","$","2,117.6"],["Ratios Based On Earned Premiums"],["Current Year Non-catastrophe Losses and LAE Ratio","","","","","","89.8","%","","","","","","71.3","%","","75.4","%"],["Current Year Catastrophe Losses and LAE Ratio","","","","","","0.4","","","","","","","0.4","","","0.4"],["Prior Years Non-catastrophe Losses and LAE Ratio","","","","","","2.4","","","","","","","0.9","","","(0.9)"],["Prior Years Catastrophe Losses and LAE Ratio","","","","","","\u2014","","","","","","","\u2014","","","\u2014"],["Total Incurred Loss and LAE Ratio","","","","","","92.6","%","","","","","","72.6","%","","74.9","%"]] [[/GREPCENT_TABLE]] 2021 Compared with 2020 Earned Premiums on specialty personal automobile insurance increased by $502.4 million in 2021, compared to 2020, due primarily to the acquisition of AAC, premium credits in the prior period, and higher volume. Incurred losses and LAE were $3,273.6 million, or 92.6% of earned premiums, in 2021, compared to $2,200.7 million, or 72.6% of earned premiums, in 2020. Incurred losses and LAE as a percentage of earned premiums increased due primarily to a deterioration in underlying losses and LAE as a percentage of earned premium as well as higher adverse loss and LAE reserve development. Underlying losses and LAE as a percentage of related earned premiums were 89.8% in 2021, compared to 71.3% in 2020, a deterioration of 18.5 points due to higher claim frequency and severity trends. Frequency trends increased as a result of driving activity returning to pre-pandemic levels. Severity trends increased due to rising inflation and supply chain constraints. Adverse loss and LAE reserve development was $85.3 million in 2021, compared to $28.2 million in 2020, primarily driven by legal developments and increased severity in personal injury protection coverage in Florida and other liability coverages. Catastrophe losses and LAE (excluding reserve development) were $14.4 million in 2021, compared to $11.6 million in 2020. 38 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) SPECIALTY PROPERTY & CASUALTY INSURANCE (Continued) Commercial Automobile Insurance Selected financial information for the commercial automobile insurance product line is presented below. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","2021","","2020","","2019"],["Net Premiums Written","","$","470.1","","","$","349.0","","","$","270.2"],["Earned Premiums","","$","414.8","","","$","304.0","","","$","252.8"],["Incurred Losses and LAE related to:"],["Current Year:"],["Non-catastrophe Losses and LAE","","$","306.4","","","$","189.9","","","$","170.9"],["Catastrophe Losses and LAE","","1.3","","","0.7","","","1.2"],["Prior Years:"],["Non-catastrophe Losses and LAE","","12.4","","","(12.9)","","","(10.8)"],["Catastrophe Losses and LAE","","\u2014","","","\u2014","","","\u2014"],["Total Incurred Losses and LAE","","$","320.1","","","$","177.7","","","$","161.3"],["Ratios Based On Earned Premiums"],["Current Year Non-catastrophe Losses and LAE Ratio","","73.9","%","","62.5","%","","67.6","%"],["Current Year Catastrophe Losses and LAE Ratio","","0.3","","","0.2","","","0.5"],["Prior Years Non-catastrophe Losses and LAE Ratio","","3.0","","","(4.2)","","","(4.3)"],["Prior Years Catastrophe Losses and LAE Ratio","","\u2014","","","\u2014","","","\u2014"],["Total Incurred Loss and LAE Ratio","","77.2","%","","58.5","%","","63.8","%"]] [[/GREPCENT_TABLE]] 2021 Compared with 2020 Earned premiums in commercial automobile insurance increased by $110.8 million in 2021, compared to 2020, due primarily to higher volume and premium credits in the prior period. Incurred losses and LAE were $320.1 million, or 77.2% of earned premiums, in 2021, compared to $177.7 million, or 58.5% of earned premiums, in 2020. Incurred losses and LAE as a percentage of earned premiums increased due primarily to a deterioration in underlying losses and LAE as a percentage of earned premiums as well as adverse loss and LAE reserve development. Underlying losses and LAE as a percentage of earned premiums were 73.9% in 2021, compared to 62.5% in 2020, a deterioration of 11.4 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 $12.4 million in 2021, compared to favorable reserve development of $12.9 million in 2020. 39 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) PREFERRED PROPERTY & CASUALTY INSURANCE Selected financial information for the Preferred Property & Casualty Insurance segment is presented below. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","2021","","2020","","2019"],["Net Premiums Written","","$","642.0","","","$","653.0","","","$","739.3"],["Earned Premiums","","$","651.7","","","$","688.2","","","$","750.3"],["Net Investment Income","","68.6","","","37.7","","","44.1"],["Change in Value of Alternative Energy Partnership Investments","","(16.3)","","","\u2014","","","\u2014"],["Other Income","","\u2014","","","0.1","","","\u2014"],["Total Revenues","","704.0","","","726.0","","","794.4"],["Incurred Losses and LAE related to:"],["Current Year:"],["Non-catastrophe Losses and LAE","","450.4","","","400.9","","","481.8"],["Catastrophe Losses and LAE","","79.1","","","82.0","","","63.0"],["Prior Years:"],["Non-catastrophe Losses and LAE","","13.5","","","20.7","","","(17.6)"],["Catastrophe Losses and LAE","","(5.6)","","","(0.5)","","","(18.4)"],["Total Incurred Losses and LAE","","537.4","","","503.1","","","508.8"],["Insurance Expenses","","206.4","","","221.1","","","233.3"],["Operating Income (Loss)","","(39.8)","","","1.8","","","52.3"],["Income Tax Benefit (Expense)","","27.3","","","1.7","","","(10.4)"],["Segment Net Operating Income (Loss)","","$","(12.5)","","","$","3.5","","","$","41.9"],["Ratios Based On Earned Premiums"],["Current Year Non-catastrophe Losses and LAE Ratio","","69.2","%","","58.3","%","","64.2","%"],["Current Year Catastrophe Losses and LAE Ratio","","12.1","","","11.9","","","8.4"],["Prior Years Non-catastrophe Losses and LAE Ratio","","2.1","","","3.0","","","(2.3)"],["Prior Years Catastrophe Losses and LAE Ratio","","(0.9)","","","(0.1)","","","(2.5)"],["Total Incurred Loss and LAE Ratio","","82.5","","","73.1","","","67.8"],["Insurance Expense Ratio","","31.7","","","32.1","","","31.1"],["Combined Ratio","","114.2","%","","105.2","%","","98.9","%"],["Underlying Combined Ratio"],["Current Year Non-catastrophe Losses and LAE Ratio","","69.2","%","","58.3","%","","64.2","%"],["Insurance Expense Ratio","","31.7","","","32.1","","","31.1"],["Underlying Combined Ratio","","100.9","%","","90.4","%","","95.3","%"],["Non-GAAP Measure Reconciliation"],["Combined Ratio","","114.2","%","","105.2","%","","98.9","%"],["Less:"],["Current Year Catastrophe Losses and LAE Ratio","","12.1","","","11.9","","","8.4"],["Prior Years Non-catastrophe Losses and LAE Ratio","","2.1","","","3.0","","","(2.3)"],["Prior Years Catastrophe Losses and LAE Ratio","","(0.9)","","","(0.1)","","","(2.5)"],["Underlying Combined Ratio","","100.9","%","","90.4","%","","95.3","%"]] [[/GREPCENT_TABLE]] 40 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) PREFERRED PROPERTY & CASUALTY INSURANCE (Continued) CATASTROPHE FREQUENCY AND SEVERITY [[GREPCENT_TABLE]] [["","","Dec 31, 2021","","Dec 31, 2020"],["DOLLARS IN MILLIONS","","Number of Events","","Losses and LAE","","Number of Events","","Losses and LAE"],["Range of Losses and LAE Per Event1:"],["Below $5","","58","","","$","42.6","","","48","","","$","42.0"],["$5 - $10","","3","","","21.5","","","5","","","40.0"],["$10 - $15","","1","","","15.0","","","\u2014","","","\u2014"],["$15 - $20","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["$20 - $25","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Greater Than $25","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total","","62","","","$","79.1","","","53","","","$","82.0"],["1 Current accident year net incurred catastrophe Losses and LAE only"]] [[/GREPCENT_TABLE]] INSURANCE RESERVES [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","Dec 31, 2021","","Dec 31, 2020"],["Insurance Reserves:"],["Preferred Automobile","","$","308.6","","","$","281.3"],["Homeowners","","95.4","","","104.0"],["Other","","29.2","","","26.3"],["Total Insurance Reserves","","$","433.2","","","$","411.6"],["Insurance Reserves:"],["Loss and Allocated LAE Reserves:"],["Case and Allocated LAE","","$","272.5","","","$","262.2"],["Incurred But Not Reported","","131.9","","","122.0"],["Total Loss and LAE Reserves","","404.4","","","384.2"],["Unallocated LAE Reserves","","28.8","","","27.4"],["Total Insurance Reserves","","$","433.2","","","$","411.6"]] [[/GREPCENT_TABLE]] See MD&A, “Critical Accounting Estimates,” under the caption “Property and Casualty Insurance Reserves for Losses and Loss Adjustment Expenses” beginning on page 62 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 2021 Compared with 2020 The Preferred Property & Casualty Insurance segment reported Segment Net Operating Loss of $12.5 million for the year ended December 31, 2021, compared to Segment Net Operating Income of $3.5 million in 2020. Segment net operating results decreased by $16.0 million due primarily to higher underlying losses and LAE as a percentage of earned premiums, partially offset by lower catastrophe losses and LAE, lower levels of adverse loss and LAE reserve development and higher net investment income. 41 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) PREFERRED PROPERTY & CASUALTY INSURANCE (Continued) Earned Premiums in the Preferred Property & Casualty Insurance segment decreased by $36.5 million in 2021, compared to 2020, due primarily to lower automobile and homeowners insurance volumes and ongoing profit improvement actions. Net Investment Income in the Preferred Property & Casualty Insurance segment increased by $30.9 million in 2021, compared to 2020, due primarily to an increase in return from Alternative Investments, higher levels of investments in fixed income securities, and higher levels of investments and rate on Company-Owned Life Insurance, partially offset by lower yields on fixed income securities. Loss related to Changes in Value of Alternative Energy Partnership Investments was $16.3 million for the year ended December 31, 2021. Tax benefits related to the Alternative Energy Partnership Investments were $21.1 million, resulting in net income attributable to Alternative Energy Partnership Investments of $4.8 million for the year ended December 31, 2021. Underlying losses and LAE as a percentage of earned premiums were 69.2% and 58.3% in 2021 and 2020, 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 $79.1 million in 2021, compared to $82.0 million in 2020, which is a decrease of $2.9 million. Catastrophe losses and LAE (excluding reserve development) decreased due primarily to a decrease in severity of catastrophic events in 2021, compared to 2020, There were four catastrophic events above $5 million in 2021, compared to five catastrophic events above $5 million in 2020. Adverse loss and LAE reserve development (including catastrophe reserve development) was $7.9 million in 2021, compared to $20.2 million in 2020. Insurance expenses were $206.4 million, or 31.7% of earned premiums, in 2021, an improvement of 0.4 percentage points compared to 2020. The Preferred Property & Casualty Insurance segment’s effective income tax rate differs from the federal statutory income tax rate due primarily to investment tax credits, tax-exempt investment income and dividends received deductions Preferred Personal Automobile Insurance Selected financial information for the preferred personal automobile insurance product line is presented below. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","2021","","2020","","2019"],["Net Premiums Written","","$","399.9","","","$","407.5","","","$","468.9"],["Earned Premiums","","$","410.5","","","$","431.7","","","$","470.2"],["Incurred Losses and LAE related to:"],["Current Year:"],["Non-catastrophe Losses and LAE","","330.4","","","279.9","","","332.5"],["Catastrophe Losses and LAE","","7.4","","","4.4","","","7.8"],["Prior Years:"],["Non-catastrophe Losses and LAE","","12.2","","","27.7","","","(8.2)"],["Catastrophe Losses and LAE","","(0.1)","","","(1.0)","","","\u2014"],["Total Incurred Losses and LAE","","$","349.9","","","$","311.0","","","$","332.1"],["Ratios Based On Earned Premiums"],["Current Year Non-catastrophe Losses and LAE Ratio","","80.4","%","","64.8","%","","70.6","%"],["Current Year Catastrophe Losses and LAE Ratio","","1.8","","","1.0","","","1.7"],["Prior Years Non-catastrophe Losses and LAE Ratio","","3.0","","","6.4","","","(1.7)"],["Prior Years Catastrophe Losses and LAE Ratio","","\u2014","","","(0.2)","","","\u2014"],["Total Incurred Loss and LAE Ratio","","85.2","%","","72.0","%","","70.6","%"]] [[/GREPCENT_TABLE]] 42 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) PREFERRED PROPERTY & CASUALTY INSURANCE (Continued) 2021 Compared with 2020 Earned premiums in preferred personal automobile insurance decreased by $21.2 million in 2021, compared to 2020, due primarily to lower volume and ongoing profit improvement actions. Incurred losses and LAE were $349.9 million, or 85.2% of earned premiums, in 2021, compared to $311.0 million, or 72.0% of earned premiums, in 2020. Incurred losses and LAE as a percentage of earned premiums increased due primarily to a deterioration in the underlying loss and LAE ratio, partially offset by lower levels of adverse loss and LAE reserve development. Underlying losses and LAE as a percentage of related earned premiums were 80.4% in 2021, compared to 64.8% in 2020, a deterioration of 15.6 percentage points primarily due to higher claim frequency and severity trends. Frequency trends increased as a result of driving activity returning to pre-pandemic levels. Severity trends increased due to rising inflation and supply chain constraints. Catastrophe losses and LAE (excluding reserve development) were $7.4 million in 2021, compared to $4.4 million in 2020. Adverse loss and LAE reserve development (including catastrophe loss reserve development) was $12.1 million in 2021, compared to $26.7 million in 2020. Homeowners Insurance Selected financial information for the homeowners insurance product line is presented below. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","2021","","2020","","2019"],["Net Premiums Written","","$","208.4","","","$","211.1","","","$","233.1"],["Earned Premiums","","$","207.3","","","$","220.7","","","$","241.3"],["Incurred Losses and LAE related to:"],["Current Year:"],["Non-catastrophe Losses and LAE","","104.1","","","108.7","","","131.6"],["Catastrophe Losses and LAE","","70.2","","","71.2","","","54.0"],["Prior Years:"],["Non-catastrophe Losses and LAE","","(2.6)","","","(2.8)","","","(2.7)"],["Catastrophe Losses and LAE","","(3.9)","","","0.7","","","(17.0)"],["Total Incurred Losses and LAE","","$","167.8","","","$","177.8","","","$","165.9"],["Ratios Based On Earned Premiums"],["Current Year Non-catastrophe Losses and LAE Ratio","","50.2","%","","49.3","%","","54.5","%"],["Current Year Catastrophe Losses and LAE Ratio","","33.9","","","32.3","","","22.4"],["Prior Years Non-catastrophe Losses and LAE Ratio","","(1.3)","","","(1.3)","","","(1.1)"],["Prior Years Catastrophe Losses and LAE Ratio","","(1.9)","","","0.3","","","(7.0)"],["Total Incurred Loss and LAE Ratio","","80.9","%","","80.6","%","","68.8","%"]] [[/GREPCENT_TABLE]] 2021 Compared with 2020 Earned premiums in homeowners insurance decreased by $13.4 million in 2021, compared to 2020, due primarily to lower volume and ongoing profit improvement actions. Incurred losses and LAE were $167.8 million, or 80.9% of earned premiums, in 2021, compared to $177.8 million, or 80.6% of earned premiums, in 2020. Incurred losses and LAE as a percentage of earned premiums increased due primarily to lower incurred catastrophe losses (excluding loss reserve development), partially offset by higher underlying losses and LAE as a percentage of earned premiums. Underlying losses and LAE as a percentage of earned premiums were 50.2% in 2021, compared to 49.3% in 2020, a deterioration of 0.9 percentage points. Catastrophe losses and LAE (excluding reserve development) were $70.2 million in 2021, compared to $71.2 million in 2020. There were four catastrophic events above $5 million in 2021, compared to five catastrophic events above $5 million in 2020. Favorable Loss and LAE reserve development (including catastrophe loss reserve development) was $6.5 million in 2021, compared to $2.1 million in 2020. 43 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) PREFERRED PROPERTY & CASUALTY INSURANCE (Continued) Other Personal Insurance Other personal insurance products include umbrella, dwelling fire, inland marine, earthquake, boat owners and other liability coverages. Selected financial information for other personal insurance product lines is presented below. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","2021","","2020","","2019"],["Net Premiums Written","","$","33.7","","","$","34.4","","","$","37.3"],["Earned Premiums","","$","33.9","","","$","35.8","","","$","38.8"],["Incurred Losses and LAE related to:"],["Current Year:"],["Non-catastrophe Losses and LAE","","15.9","","","12.3","","","17.7"],["Catastrophe Losses and LAE","","1.5","","","6.4","","","1.2"],["Prior Years:"],["Non-catastrophe Losses and LAE","","3.9","","","(4.2)","","","(6.7)"],["Catastrophe Losses and LAE","","(1.6)","","","(0.2)","","","(1.4)"],["Total Incurred Losses and LAE","","$","19.7","","","$","14.3","","","$","10.8"],["Ratios Based On Earned Premiums"],["Current Year Non-catastrophe Losses and LAE Ratio","","46.9","%","","34.3","%","","45.6","%"],["Current Year Catastrophe Losses and LAE Ratio","","4.4","","","17.9","","","3.1"],["Prior Years Non-catastrophe Losses and LAE Ratio","","11.5","","","(11.7)","","","(17.3)"],["Prior Years Catastrophe Losses and LAE Ratio","","(4.7)","","","(0.6)","","","(3.6)"],["Total Incurred Loss and LAE Ratio","","58.1","%","","39.9","%","","27.8","%"]] [[/GREPCENT_TABLE]] 2021 Compared with 2020 Earned premiums in other personal insurance decreased by $1.9 million in 2021, compared to 2020. Incurred losses and LAE were $19.7 million, or 58.1% of earned premiums, in 2021, compared to $14.3 million, or 39.9% of earned premiums, in 2020. Underlying losses and LAE as a percentage of earned premiums were 46.9% in 2021, compared to 34.3% in 2020, a deterioration of 12.6 percentage points. Catastrophe losses and LAE (excluding reserve development) were $1.5 million in 2021, compared to $6.4 million in 2020. Adverse loss and LAE reserve development (including catastrophe loss reserve development) was $2.3 million in 2021, compared to favorable development of $4.4 million in 2020. 44 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) LIFE & HEALTH INSURANCE Selected financial information for the Life & Health Insurance segment is presented below. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","2021","","2020","","2019"],["Earned Premiums","","$","653.5","","","$","648.7","","","$","643.7"],["Net Investment Income","","202.7","","","198.8","","","206.4"],["Change in Value of Alternative Energy Partnership Investments","","(15.8)","","","\u2014","","","\u2014"],["Other Income","","(1.3)","","","0.6","","","8.5"],["Total Revenues","","839.1","","","848.1","","","858.6"],["Policyholders\u2019 Benefits and Incurred Losses and LAE","","469.7","","","442.0","","","402.7"],["Insurance Expenses","","358.9","","","334.9","","","334.0"],["Operating Income (Loss)","","10.5","","","71.2","","","121.9"],["Income Tax Benefit (Expense)","","17.7","","","(11.2)","","","(23.2)"],["Segment Net Operating Income (Loss)","","$","28.2","","","$","60.0","","","$","98.7"]] [[/GREPCENT_TABLE]] INSURANCE RESERVES [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","Dec 31, 2021","","Dec 31, 2020"],["Insurance Reserves:"],["Future Policyholder Benefits","","$","3,454.1","","","$","3,440.5"],["Incurred Losses and LAE Reserves:"],["Life","","60.7","","","61.1"],["Accident and Health","","26.1","","","25.9"],["Property","","3.6","","","4.6"],["Total Incurred Losses and LAE Reserves","","90.4","","","91.6"],["Total Insurance Reserves","","$","3,544.5","","","$","3,532.1"]] [[/GREPCENT_TABLE]] Use of Death Verification Databases In the third quarter of 2016, the Company’s Life & Health segment voluntarily began implementing a comprehensive process under which it cross-references its life insurance policies against the Death Master File maintained by the Social Security Administration and other death verification databases to identify potential situations where the beneficiaries may not have filed a claim following the death of an insured and initiate an outreach process to identify and contact beneficiaries and settle claims. Policyholders’ Benefits and Incurred Losses and Loss Adjustment Expenses for the year ended December 31, 2016 included a pre-tax charge of $77.8 million to recognize the initial impact of using death verification databases in the Company’s operations, including to determine its IBNR liability for unpaid claims and claims adjustment expenses for life insurance products. Subsequently, the Company has reduced its estimate of the initial impact of using death verification databases by $30.3 million, of which $9.3 million was recognized during 2020. See Note 2, “Summary of Accounting Policies and Accounting Changes,” to the Consolidated Financial Statements under the sub-caption “Insurance Reserves” for additional discussion. 2021 Compared with 2020 Earned Premiums in the Life & Health Insurance segment increased by $4.8 million for the year ended December 31, 2021, compared to 2020. Earned Premiums increased due primarily to higher volume on life insurance products partially offset by lower volume on accident and health insurance products and property insurance products as well as a reduction in the estimated return premium reserve for insurance products subject to minimum loss ratio (“MLR”) in 2020. Net Investment Income increased by $3.9 million in 2021, compared to 2020, due primarily to an increase in return from Alternative Investments, higher levels of investments in fixed income securities, and higher rate on Company-Owned Life Insurance, partially offset by lower yields on fixed income securities. 45 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) LIFE & HEALTH INSURANCE (Continued) Loss related to Changes in Value of Alternative Energy Partnership Investments was $15.8 million for the year ended December 31, 2021. Tax benefits related to the Alternative Energy Partnership Investments were $20.4 million, resulting in net income attributable to Alternative Energy Partnership Investments of $4.6 million for the year ended December 31, 2021. Policyholders’ Benefits and Incurred Losses and LAE increased by $27.7 million in 2021, compared to 2020, due primarily to higher mortality for life insurance related to COVID-19, higher persistency on life insurance, the impact of reducing the Company’s estimate of the ultimate cost of using death verification databases in the Company’s operations in 2020, and higher frequency and severity of accident and health insurance claims as utilization of supplemental accident and health insurance products normalized to pre-pandemic levels. Insurance Expenses in the Life & Health Insurance segment increased by $24.0 million in 2021, compared to 2020, due primarily to higher commission expense driven by increased persistency and investments made to modernize and strengthen the distribution channel and enhance the capabilities of the business. Segment Net Operating Income in the Life & Health Insurance segment was $28.2 million for the year ended December 31, 2021, compared to $60.0 million in 2020. The Life & Health Insurance segment’s effective income tax rate differs from the federal statutory income tax rate due primarily to investment tax credits, tax-exempt investment income and dividends received deductions. Life Insurance Selected financial information for the life insurance product line is presented below. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","2021","","2020","","2019"],["Earned Premiums","","$","401.7","","","$","385.7","","","$","384.6"],["Net Investment Income","","196.8","","","193.3","","","198.8"],["Change in Value of Alternative Energy Partnership Investments","","(15.0)","","","\u2014","","","\u2014"],["Other Income","","(1.6)","","","\u2014","","","8.1"],["Total Revenues","","581.9","","","579.0","","","591.5"],["Policyholders\u2019 Benefits and Incurred Losses and LAE","","345.3","","","318.2","","","270.1"],["Insurance Expenses","","235.6","","","218.8","","","215.3"],["Operating Income (Loss)","","1.0","","","42.0","","","106.1"],["Income Tax Benefit (Expense)","","18.7","","","(5.2)","","","(20.0)"],["Total Product Line Net Operating Income (Loss)","","$","19.7","","","$","36.8","","","$","86.1"]] [[/GREPCENT_TABLE]] 2021 Compared with 2020 Earned premiums on life insurance increased by $16.0 million in 2021, compared to 2020, due primarily to increased new business and higher persistency. Policyholders’ benefits and incurred losses and LAE on life insurance were $345.3 million in 2021, compared to $318.2 million in 2020, an increase of $27.1 million due primarily to higher mortality related to COVID-19, higher persistency, and the impact of reducing the Company’s estimate of the ultimate cost of using death verification databases in the Company’s operation in 2020. Insurance Expenses increased by $16.8 million in 2021, compared to 2020, due primarily to higher commission expense driven by increased persistency and investments made to modernize and strengthen the distribution channel and enhance the capabilities of the business. 46 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) LIFE & HEALTH INSURANCE (Continued) Accident and Health Insurance Selected financial information for the accident and health insurance product line is presented below. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","2021","","2020","","2019"],["Earned Premiums","","$","189.9","","","$","199.3","","","$","190.9"],["Net Investment Income","","3.6","","","5.0","","","6.0"],["Change in Value of Alternative Energy Partnership Investments","","(0.3)","","","\u2014","","","\u2014"],["Other Income","","0.3","","","0.6","","","0.4"],["Total Revenues","","193.5","","","204.9","","","197.3"],["Policyholders\u2019 Benefits and Incurred Losses and LAE","","96.1","","","95.3","","","109.8"],["Insurance Expenses","","91.6","","","91.9","","","88.7"],["Operating Income (Loss)","","5.8","","","17.7","","","(1.2)"],["Income Tax Benefit (Expense)","","(0.9)","","","(3.6)","","","0.3"],["Total Product Line Net Operating Income (Loss)","","$","4.9","","","$","14.1","","","$","(0.9)"]] [[/GREPCENT_TABLE]] 2021 Compared with 2020 Earned premiums on accident and health insurance decreased by $9.4 million in 2021, compared to 2020. Earned premiums decreased due primarily to lower volume on new business sales and a reduction in the estimated return premium reserve for certain insurance products subject to MLR in 2020. Incurred accident and health insurance losses were $96.1 million, or 50.6% of accident and health insurance earned premiums, in 2021, compared to $95.3 million, or 47.8% of accident and health insurance earned premiums, in 2020, due primarily to higher frequency and severity of claims as utilization of supplemental accident and health insurance products normalized to pre-pandemic levels.  Insurance expenses decreased by $0.3 million in 2021, compared to 2020. 47 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) LIFE & HEALTH INSURANCE (Continued) Property Insurance Selected financial information for the property insurance product line is presented below. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","2021","","2020","","2019"],["Earned Premiums","","$","61.9","","","$","63.7","","","$","68.2"],["Net Investment Income","","2.3","","","0.5","","","1.6"],["Change in Value of Alternative Energy Partnership Investments","","(0.5)","","","\u2014","","","\u2014"],["Total Revenues","","63.7","","","64.2","","","69.8"],["Incurred Losses and LAE related to:"],["Current Year:"],["Non-catastrophe Losses and LAE","","14.2","","","15.2","","","18.1"],["Catastrophe Losses and LAE","","13.0","","","12.4","","","3.1"],["Prior Years:"],["Non-catastrophe Losses and LAE","","1.2","","","0.4","","","0.8"],["Catastrophe Losses and LAE","","(0.1)","","","0.5","","","0.8"],["Total Incurred Losses and LAE","","28.3","","","28.5","","","22.8"],["Insurance Expenses","","31.7","","","24.2","","","30.0"],["Operating Income (Loss)","","3.7","","","11.5","","","17.0"],["Income Tax Benefit (Expense)","","(0.1)","","","(2.4)","","","(3.5)"],["Total Product Line Net Operating Income (Loss)","","$","3.6","","","$","9.1","","","$","13.5"],["Ratios Based On Earned Premiums"],["Current Year Non-catastrophe Losses and LAE Ratio","","23.0","%","","23.8","%","","26.5","%"],["Current Year Catastrophe Losses and LAE Ratio","","21.0","","","19.5","","","4.5"],["Prior Years Non-catastrophe Losses and LAE Ratio","","1.9","","","0.6","","","1.2"],["Prior Years Catastrophe Losses and LAE Ratio","","(0.2)","","","0.8","","","1.2"],["Total Incurred Loss and LAE Ratio","","45.7","%","","44.7","%","","33.4","%"]] [[/GREPCENT_TABLE]] 2021 Compared with 2020 Earned premiums on property insurance decreased by $1.8 million in 2021, compared to 2020, due primarily to a lower volume. Incurred losses and LAE on property insurance were $28.3 million, or 45.7% of earned premiums, in 2021, compared to $28.5 million, or 44.7% earned premiums, in 2020. Underlying losses and LAE were $14.2 million, or 23.0% of property insurance earned premiums, in 2021, compared to $15.2 million, or 23.8% of property insurance earned premiums, in 2020, a decrease of 0.8 percentage points due primarily to lower claim severity. Catastrophe losses and LAE (excluding loss reserve development) were $13.0 million in 2021, compared to $12.4 million in 2020. Catastrophe losses and LAE increased $0.6 million due primarily to higher frequency and severity of catastrophe claims. Adverse loss and LAE reserve development was $1.1 million in 2021, compared to $0.9 million in 2020. Insurance expenses increased $7.5 million in 2021, compared to 2020, due primarily to investments made to modernize and strengthen the distribution channel and enhance the capabilities of the business. 48 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) INVESTMENT RESULTS Net Investment Income Net Investment Income for the years ended December 31, 2021, 2020 and 2019 is presented below. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","2021","","2020","","2019"],["Investment Income:"],["Interest on Fixed Income Securities","","$","277.7","","","$","289.8","","","$","299.4"],["Dividends on Equity Securities Excluding Alternative Investments","","15.9","","","15.4","","","22.9"],["Alternative Investments:"],["Equity Method Limited Liability Investments","","56.7","","","4.9","","","1.0"],["Limited Liability Investments Included in Equity Securities","","46.9","","","22.1","","","18.0"],["Total Alternative Investments","","103.6","","","27.0","","","19.0"],["Short-term Investments","","1.0","","","5.5","","","8.2"],["Loans to Policyholders","","21.7","","","22.1","","","22.6"],["Real Estate","","9.3","","","9.6","","","9.8"],["Other","","32.4","","","13.2","","","1.5"],["Total Investment Income","","461.6","","","382.6","","","383.4"],["Investment Expenses:"],["Real Estate","","9.7","","","8.8","","","9.6"],["Other Investment Expenses","","24.6","","","25.6","","","9.5"],["Total Investment Expenses","","34.3","","","34.4","","","19.1"],["Net Investment Income","","$","427.3","","","$","348.2","","","$","364.3"]] [[/GREPCENT_TABLE]] 2021 Compared with 2020 Net Investment Income was $427.3 million and $348.2 million for the years ended December 31, 2021 and 2020, respectively. Net Investment Income increased by $79.1 million in 2021 due primarily to higher valuations of Equity Method Limited Liability Investments and higher volume of distributions received from appreciated Limited Liability Investments included in Equity Securities, partially offset by lower yields from the Fixed Maturities portfolio reflecting lower reinvestment yields. Increase in Other Net Investment Income is driven by income from Company-Owned Life Insurance due to higher average investment balance and rate. Income and distributions on Alternative Investments can fluctuate significantly between periods as they are influenced by operating performance of the underlying investments, changes in market or economic conditions or the timing of asset sales. 49 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) INVESTMENT RESULTS (Continued) Total Comprehensive Investment Gains (Losses) The components of Total Comprehensive Investment Gains (Losses) for the years ended December 31, 2021, 2020 and 2019 are presented below. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","2021","","2020","","2019"],["Recognized in Consolidated Statements of Income:"],["Income (Loss) from Change in Fair Value of Equity and Convertible Securities","","$","114.6","","","$","72.1","","","$","138.9"],["Gains on Sales","","68.0","","","48.3","","","46.9"],["Losses on Sales","","(3.2)","","","(10.2)","","","(5.0)"],["Impairment Losses","","(11.0)","","","(19.5)","","","(13.8)"],["Net Gain (Loss) Recognized in Consolidated Statements of Income","","168.4","","","90.7","","","167.0"],["Recognized in Other Comprehensive Income (Loss)","","(286.6)","","","367.4","","","405.3"],["Total Comprehensive Investment Gains (Losses)","","$","(118.2)","","","$","458.1","","","$","572.3"]] [[/GREPCENT_TABLE]] Total Comprehensive Investment Gains (Losses) decreased by $576.3 million primarily due to decline in fixed maturities unrealized capital gains, partially offset by higher income from increased valuations of equity and convertible securities. Fixed maturities valuations decreased primarily due to higher interest rates. Income (Loss) From Change in Fair Value of Equity and Convertible Securities The components of Income (Loss) from Change in Fair Value of Equity and Convertible Securities for the years ended December 31, 2021 and 2020 are presented below. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","2021","","2020"],["Preferred Stocks","","$","1.9","","","$","(0.7)"],["Common Stocks","","1.7","","","(0.3)"],["Other Equity Interests:"],["Exchange Traded Funds","","75.8","","","68.0"],["Limited Liability Companies and Limited Partnerships","","31.3","","","1.7"],["Total Other Equity Interests","","107.1","","","69.7"],["Income (Loss) from Change in Fair Value of Equity Securities","","110.7","","","68.7"],["Income (Loss) from Change in Fair Value of Convertible Securities","","3.9","","","3.4"],["Income (Loss) from Change in Fair Value of Equity and Convertible Securities","","$","114.6","","","$","72.1"]] [[/GREPCENT_TABLE]] 50 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) INVESTMENT RESULTS (Continued) Net Realized Gains on Sales of Investments The components of Net Realized Gains on Sales of Investments for the year ended December 31, 2021, 2020 and 2019 are presented below. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","2021","","2020","","2019"],["Fixed Maturities:"],["Gains on Sales","","$","63.4","","","$","40.6","","","$","41.1"],["Losses on Sales","","(2.1)","","","(7.9)","","","(4.8)"],["Equity Securities:"],["Gains on Sales","","4.1","","","5.9","","","5.8"],["Losses on Sales","","(0.7)","","","(1.9)","","","(0.2)"],["Equity Method Limited Liability Investments:"],["Gains on Sales","","0.4","","","\u2014","","","\u2014"],["Losses on Sales","","\u2014","","","(0.4)","","","\u2014"],["Real Estate:"],["Gains on Sales","","0.1","","","1.8","","","\u2014"],["Losses on Sales","","(0.4)","","","\u2014","","","\u2014"],["Net Realized Gains on Sales of Investments","","$","64.8","","","$","38.1","","","$","41.9"],["Gross Gains on Sales","","$","68.0","","","$","48.3","","","$","46.9"],["Gross Losses on Sales","","(3.2)","","","(10.2)","","","(5.0)"],["Net Realized Gains on Sales of Investments","","$","64.8","","","$","38.1","","","$","41.9"]] [[/GREPCENT_TABLE]] Fixed Maturities Net Realized Gains on Sales of Fixed Maturities for the year ended December 31, 2021 primarily relate to normal portfolio management and to a lesser extent, a repositioning of the portfolio for duration extension purposes. Net Realized Gains on Sales of Fixed Maturities for the year ended December 31, 2020 primarily relate to a repositioning of the portfolio for duration extension purposes. Equity Securities Net Realized Gains on Sales of Equity Securities for the year ended December 31, 2021 primarily relate to transactions whereby the Company’s interests in Equity Securities at Modified Cost were acquired by other companies. Net Realized Gains on Sales of Equity Securities for the year ended December 31, 2020 primarily relate to transactions whereby the Company’s investments were acquired by other companies. Other sales activity in 2021 and 2020 were due to normal portfolio management. 51 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) INVESTMENT RESULTS (Continued) Impairment Losses The Company regularly reviews its investment portfolio to determine whether a decline in the fair value of an investment has occurred from credit or other, non-credit related factors. If the decline in fair value is due to credit factors and the Company does not expect to receive cash flows sufficient to support the entire amortized cost basis, the credit loss is reported in the Consolidated Statements of Income in the period that the declines are evaluated. The components of Impairment Losses in the Consolidated Statements of Income for the year ended December 31, 2021, 2020 and 2019 is presented below. [[GREPCENT_TABLE]] [["","","2021","","2020","","2019"],["DOLLARS IN MILLIONS","","Amount","","Number of Issuers","","Amount","","Number of Issuers","","Amount","","Number of Issuers"],["Fixed Maturities","","$","(6.4)","","","17","","$","(16.7)","","","14","","$","(13.3)","","","14"],["Equity Securities","","(4.2)","","","13","","(2.8)","","","2","","(0.5)","","","1"],["Real Estate","","(0.4)","","","1","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Net Impairment Losses Recognized in Earnings","","$","(11.0)","","","","","$","(19.5)","","","","","$","(13.8)"]] [[/GREPCENT_TABLE]] Fixed Maturities Impairment Losses recognized in the Consolidated Statements of Income for the year ended December 31, 2021 related primarily to investments in Fixed Maturities where the Company established an allowance for expected credit loss. Impairment Losses recognized in the Consolidated Statements of Income for the year ended December 31, 2020 related primarily to investments in Fixed Maturities where the Company had the intent to sell or requirement to sell. Equity Securities Impairment Losses recognized in the Consolidated Statements of Income for the years ended December 31, 2021 and 2020 related primarily to investments in Equity Securities at Modified Cost where the Company had the intent or requirement to sell. Real Estate Impairment Losses recognized in the Consolidated Statements of Income for the year ended December 31, 2021 related to investments in Real Estate held with the intent to sell. No impairment losses were recognized for the year ended December 31, 2020. INVESTMENT QUALITY AND CONCENTRATIONS The Company’s fixed maturity investment portfolio is comprised primarily of corporate, high-grade corporate, municipal agency bonds, and collateralized loan obligations. At December 31, 2021, approximately 95% 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 the National 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 of AAA, AA, A or BBB from Standard & Poor’s (“S&P”); a rating of Aaa, Aa, A or Baa from Moody’s Investors Service (“Moody’s”); or a rating of AAA, AA, A or BBB from Fitch Ratings. 52 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) INVESTMENT QUALITY AND CONCENTRATIONS (Continued) The following table summarizes the credit quality of the Company’s fixed maturity investment portfolio at December 31, 2021 and 2020. [[GREPCENT_TABLE]] [["NAIC Rating","","Rating","","Dec 31, 2021","","Dec 31, 2020"],["Fair Value in Millions","","Percentage of Total","","Fair Value in Millions","","Percentage of Total"],["1","","AAA, AA, A","","$","5,351.6","","","67.0","%","","$","4,759.9","","","62.6","%"],["2","","BBB","","2,215.1","","","27.7","","","2,355.6","","","31.0"],["3-4","","BB, B","","331.0","","","4.2","","","353.1","","","4.6"],["5-6","","CCC or Lower","","89.2","","","1.1","","","137.3","","","1.8"],["Total Investments in Fixed Maturities","","$","7,986.9","","","100.0","%","","$","7,605.9","","","100.0","%"]] [[/GREPCENT_TABLE]] Gross unrealized losses on the Company’s investments in below-investment-grade fixed maturities were $9.0 million and $23.7 million at December 31, 2021 and 2020, respectively. The following table summarizes the fair value of the Company’s investments in governmental fixed maturities at December 31, 2021 and 2020. [[GREPCENT_TABLE]] [["","","Dec 31, 2021","","Dec 31, 2020"],["DOLLARS IN MILLIONS","","Fair Value","","Percentage of Total Investments","","Fair Value","","Percentage of Total Investments"],["U.S. Government and Government Agencies and Authorities","","$","637.4","","","6.1","%","","$","585.3","","","5.6","%"],["States and Political Subdivisions:"],["Revenue Bonds","","1,516.1","","","14.6","","","1,153.3","","","11.1"],["States","","235.8","","","2.3","","","333.5","","","3.2"],["Political Subdivisions","","138.2","","","1.3","","","102.6","","","1.0"],["Foreign Governments","","5.5","","","0.1","","","5.2","","","\u2014"],["Total Investments in Governmental Fixed Maturities","","$","2,533.0","","","24.4","%","","$","2,179.9","","","20.9","%"]] [[/GREPCENT_TABLE]] The following table summarizes the fair value of the Company’s investments in non-governmental fixed maturities by industry at December 31, 2021 and 2020. [[GREPCENT_TABLE]] [["","","Dec 31, 2021","","Dec 31, 2020"],["DOLLARS IN MILLIONS","","Fair Value","","Percentage of Total Investments","","Fair Value","","Percentage of Total Investments"],["Finance, Insurance and Real Estate","","$","1,996.7","","","19.2","%","","$","1,916.3","","","18.4","%"],["Manufacturing","","1,571.0","","","15.1","","","1,633.5","","","15.7"],["Transportation, Communication and Utilities","","815.8","","","7.9","","","825.5","","","7.9"],["Services","","617.5","","","5.9","","","581.3","","","5.6"],["Mining","","254.3","","","2.4","","","285.7","","","2.7"],["Retail Trade","","171.4","","","1.7","","","172.6","","","1.7"],["Construction","","13.1","","","0.1","","","\u2014","","","\u2014"],["Other","","14.1","","","0.1","","","11.0","","","0.1"],["Total Investments in Non-governmental Fixed Maturities","","$","5,453.9","","","52.4","%","","$","5,425.9","","","52.1","%"]] [[/GREPCENT_TABLE]] 53 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) 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 at December 31, 2021. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","Number of Issuers","","Aggregate Fair Value"],["Below $5","","611","","","$","1,333.8"],["$5 -$10","","200","","","1,435.9"],["$10 - $20","","121","","","1,647.2"],["$20 - $30","","30","","","721.4"],["Greater Than $30","","9","","","315.6"],["Total","","971","","","$","5,453.9"]] [[/GREPCENT_TABLE]] The Company’s short-term investments primarily consist of money market funds, U.S. treasury bills, and short term bonds. At December 31, 2021, the Company had $272.1 million invested in money market funds which primarily invest in U.S. Treasury securities and $12.0 million invested in U.S. treasury bills and short-term bonds. The following table summarizes the fair value of the Company’s ten largest investment exposures in a single issuer, excluding investments in U.S. Government and Government Agencies and Authorities and Short-term Investment, at December 31, 2021. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","Fair Value","","Percentage of Total Investments"],["Fixed Maturities:"],["States including their Political Subdivisions:"],["Texas","","$","151.4","","","1.5","%"],["California","","107.6","","","1.0"],["Georgia","","98.0","","","0.9"],["New York","","95.1","","","0.9"],["Florida","","74.8","","","0.7"],["Louisiana","","74.7","","","0.7"],["Colorado","","70.8","","","0.7"],["Pennsylvania","","68.6","","","0.7"],["Equity Securities at Fair Value\u2014Other Equity Interests:"],["Vanguard Total World Stock ETF","","226.9","","","2.2"],["iShares\u00ae Core MSCI Total International Stock ETF","","86.1","","","0.8"],["Total","","$","1,054.0","","","10.1","%"]] [[/GREPCENT_TABLE]] 54 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) INVESTMENTS IN LIMITED LIABILITY COMPANIES AND LIMITED PARTNERSHIPS The Company owns investments in various limited liability investment companies and limited partnerships that primarily invest in mezzanine debt, distressed debt, and senior debt. The Company’s investments in these limited liability investment companies and limited partnerships are reported either as Equity Method Limited Liability Investments, Other Equity Interests and included in Equity Securities at Fair Value, or Equity Securities at Modified Cost depending on the accounting method used to report the investment. Additional information pertaining to these investments at December 31, 2021 and 2020 is presented below. [[GREPCENT_TABLE]] [["","","Unfunded Commitment in Millions","","Reported Value in Millions"],["Asset Class","","Dec 31, 2021","","Dec 31, 2021","","Dec 31, 2020"],["Reported as Equity Method Limited Liability Investments:"],["Mezzanine Debt","","$","43.3","","","$","120.0","","","$","102.5"],["Senior Debt","","46.7","","","27.5","","","28.6"],["Distressed Debt","","100.1","","","21.7","","","14.5"],["Secondary Transactions","","8.3","","","11.7","","","11.2"],["Leveraged Buyout","","0.1","","","8.7","","","3.5"],["Growth Equity","","\u2014","","","0.7","","","0.7"],["Real Estate","","\u2014","","","29.9","","","29.9"],["Hedge Fund","","\u2014","","","8.7","","","\u2014"],["Other","","\u2014","","","13.0","","","13.1"],["Total Equity Method Limited Liability Investments","","198.5","","","241.9","","","204.0"],["Alternative Energy Partnership Investments","","\u2014","","","39.6","","","21.3"],["Reported as Other Equity Interests at Fair Value:"],["Mezzanine Debt","","53.7","","","129.3","","","118.3"],["Senior Debt","","15.1","","","29.9","","","33.9"],["Distressed Debt","","20.0","","","44.9","","","31.8"],["Secondary Transactions","","6.8","","","4.0","","","4.2"],["Hedge Funds","","\u2014","","","82.7","","","71.6"],["Leveraged Buyout","","6.0","","","32.2","","","30.7"],["Growth Equity","","0.7","","","2.0","","","\u2014"],["Other","","\u2014","","","\u2014","","","1.5"],["Total Reported as Other Equity Interests at Fair Value","","102.3","","","325.0","","","292.0"],["Reported as Equity Securities at Modified Cost:"],["Other","","\u2014","","","7.7","","","15.7"],["Total Reported as Equity Securities at Modified Cost","","\u2014","","","7.7","","","15.7"],["Total Investments in Limited Liability Companies and Limited Partnerships","","$","300.8","","","$","614.2","","","$","533.0"]] [[/GREPCENT_TABLE]] The Company expects that it will be required to fund its commitments over the next several years. The Company expects that the proceeds from distributions from these investments will be the primary source of funding of such commitments. 55 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) INSURANCE, INTEREST AND OTHER EXPENSES Expenses for the year ended December 31, 2021, 2020 and 2019 were: [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","2021","","2020","","2019"],["Insurance Expenses:"],["Commissions","","$","817.6","","","$","745.8","","","$","708.8"],["General Expenses","","339.5","","","307.4","","","278.0"],["Taxes, Licenses and Fees","","104.3","","","94.2","","","93.5"],["Total Costs Incurred","","1,261.4","","","1,147.4","","","1,080.3"],["Net Policy Acquisition Costs Amortized (Deferred)","","(88.3)","","","(51.6)","","","(66.9)"],["Amortization of Value of Business Acquired (\u201cVOBA\u201d)","","45.0","","","4.7","","","6.3"],["Insurance Expenses","","1,218.1","","","1,100.5","","","1,019.7"],["Interest and Other Expenses:"],["Loss from Early Extinguishment of Debt","","\u2014","","","\u2014","","","5.8"],["Interest Expense","","43.6","","","36.0","","","42.5"],["Other Expenses:"],["Acquisition Related Transaction, Integration and Other Costs","","43.9","","","63.3","","","18.4"],["Pension Settlement Expense","","\u2014","","","64.1","","","\u2014"],["Other","","131.9","","","108.1","","","102.9"],["Other Expenses","","175.8","","","235.5","","","121.3"],["Interest and Other Expenses","","219.4","","","271.5","","","163.8"],["Total Expenses","","$","1,437.5","","","$","1,372.0","","","$","1,189.3"]] [[/GREPCENT_TABLE]] Insurance Expenses Insurance Expenses increased by $117.6 million for the year ended December 31, 2021, compared to 2020, due primarily to growth in business and increased amortization of VOBA with the acquisition of AAC. Interest and Other Expenses Interest expense increased by $7.6 million for the year ended December 31, 2021, compared to 2020, due primarily to the addition of the 2030 Senior Notes in September 2020. See MD&A, “Liquidity and Capital Resources,” and Note 19, “Debt,” to the Consolidated Financial Statements for additional discussion of debt activity. Other Expenses decreased by $59.7 million for the year ended December 31, 2021, compared to 2020, due primarily to prior year Pension Settlement Expenses related to purchasing annuities on behalf of certain plan participants and lump-sum payments made to certain terminated vested participants and lower current year Acquisition Related Transaction, Integration and Other Costs. INCOME TAXES The federal corporate statutory income tax rate was 21% for the year ended December 31, 2021 and 2020. The Company’s effective income tax rate differs from the federal corporate income tax rate due primarily to (1) the effects of tax-exempt investment income and dividends received deductions, (2) nontaxable income associated with the change in cash surrender value on Company-Owned Life Insurance, (3) Alternative Energy Partnership Investment tax credits, (4) a permanent difference between the amount of long-term equity-based compensation expense recognized under GAAP and the amount deductible in the computation of Federal taxable income, and (5) a permanent difference associated with nondeductible executive compensation. Tax-exempt investment income and dividends received deductions were $21.8 million and $19.0 million for the years ended December 31, 2021 and 2020, respectively. The nontaxable increase in cash surrender value on COLI was $25.7 million and $12.9 million for the years ended December 31, 2021 and 2020, respectively. The Company realized net investment tax credits of $66.1 million and $3.2 million for the years ended December 31, 2021 and 2020, respectively. The amount of expense recognized for long-term equity-based compensation expense under U.S. GAAP was $1.3 million and $10.5 million lower than the amount that would be deductible under the Internal Revenue Code (the “IRC”) for the years ended December 31, 2021 and 56 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) INCOME TAXES (Continued) 2020, respectively. The amount of nondeductible executive compensation was $13.0 million and $13.0 million for years ended December 31, 2021 and 2020, respectively. See Note 23, “Income Taxes,” to the Consolidated Financial Statements for additional discussion of income taxes. LIQUIDITY AND CAPITAL RESOURCES Shelf Registration Statement The Company filed a universal shelf registration statement with the Securities and Exchange Commission in the first quarter of 2020. Under this shelf registration, the Company may issue an undetermined amount of securities including common stock, preferred stock, depository shares, debt securities, warrants, subscription rights, purchase contracts, and purchase units. Specific terms of any securities issued under this registration will be included in each applicable prospectus supplement. Common Stock Offering Kemper is authorized to issue 20 million shares of $0.10 par value preferred stock and 100 million shares of $0.10 par value common stock. No preferred shares were issued or outstanding at December 31, 2021 and 2020. There were 63,684,628 shares and 65,436,207 shares of common stock outstanding at December 31, 2021 and 2020, respectively. Long-term Debt From time to time, the Company looks to opportunistically raise capital in the debt markets. The Company designates debt obligations as either short-term or long-term based on maturity date at issuance, or in the case of the 2022 Senior Notes, based on the date of assumption. Total amortized cost of Long-term Debt outstanding at December 31, 2021 and December 31, 2020 was: [[GREPCENT_TABLE]] [["(Dollars in Millions)","","Dec 31, 2021","","Dec 31, 2020"],["Term Loan due July 5, 2023","","$","\u2014","","","$","49.9"],["5.000% Senior Notes due September 19, 2022","","276.7","","","278.3"],["4.350% Senior Notes due February 15, 2025","","449.0","","","448.8"],["2.400% Senior Notes due September 30, 2030","","396.2","","","395.8"],["Total Long-term Debt Outstanding","","$","1,121.9","","","$","1,172.8"]] [[/GREPCENT_TABLE]] See Note 19, “Debt,” to the Consolidated Financial Statements for more information regarding the Company’s long-term debt. Amended and Extended Credit Agreement and Term Loan Facility From time to time, the Company looks to opportunistically raise capital in the credit markets and is considering an increase in its existing credit facility. On June 8, 2018, the Company entered into an amended and extended credit agreement and term loan facility. The amended and extended credit agreement increased the borrowing capacity of the existing unsecured credit agreement to $300.0 million and extended the maturity date to June 8, 2023. The term loan facility included a delayed draw feature with borrowing capacity of $250.0 million and a maturity date two years from the borrowing date (see discussion below under the heading, “Repayment of Term Loan Due 2020,” for additional information regarding the initial borrowing and subsequent repayment of this delayed-draw term loan). On June 4, 2019, the Company utilized the accordion feature under the credit agreement to increase its credit borrowing capacity by $100.0 million, resulting in the available credit commitments increasing from $300.0 million to $400.0 million. The Company incurred $0.1 million in additional debt issuance costs in connection with the utilization of the accordion feature, which in addition to the $0.5 million of remaining unamortized costs under the credit agreement, will be amortized under the remaining term of the credit agreement. There were no outstanding borrowings under the credit agreement at either December 31, 2021 or December 31, 2020. Federal Home Loan Bank Agreements Kemper’s subsidiaries, United Insurance, Trinity Universal Insurance Company (“Trinity”) and Alliance United Insurance Company (“Alliance”) are members of the FHLB of Chicago, Dallas and San Francisco, respectively. Alliance became a member of the FHLB of San Francisco in August 2020. United Insurance became a member of the FHLB of Chicago in March 2014. Trinity became a member of the FHLB of Dallas in December 2013. Under their memberships, United, Trinity and Alliance may borrow through the advance program of their respective FHLB. As a requirement of membership in the FHLB, 57 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) LIQUIDITY AND CAPITAL RESOURCES (Continued) United Insurance, Trinity, and Alliance must maintain certain levels of investment in FHLB common stock and additional amounts based on the level of outstanding borrowings. The Company’s investments in FHLB common stock are reported at cost and included in Equity Securities at Modified Cost. The carrying value of FHLB of Chicago common stock was $11.8 million and $11.8 million at December 31, 2021 and December 31, 2020, respectively. The carrying value of FHLB of Dallas common stock was $3.4 million and $3.4 million at December 31, 2021 and December 31, 2020, respectively. The carrying value of FHLB of San Francisco common stock was $1.7 million and $1.7 million at December 31, 2021 and December 31, 2020, respectively. The Company periodically uses short-term FHLB borrowings for a combination of cash management and risk management purposes. It also uses long-term FHLB borrowings for spread lending purposes. During 2021, United Insurance received advances of $385.4 million from the FHLB of Chicago and made repayments of $391.3 million. United Insurance had outstanding advances from the FHLB of Chicago totaling $401.9 million at December 31, 2021. These advances were made in connection with the Company’s spread lending program. The proceeds related to these advances were used to purchase fixed maturity securities to earn incremental net investment income. With respect to these advances, United Insurance held pledged securities in a custodial account with the FHLB of Chicago with a fair value of $556.6 million at December 31, 2021. The fair value of the collateral pledged must be maintained at certain specified levels above the borrowed amount, which can vary depending on the assets pledged. If the fair value of the collateral declines below these specified levels of the amount borrowed, United Insurance would be required to pledge additional collateral or repay outstanding borrowings. See Note 18, “Policyholder Obligations,” to the Consolidated Financial Statements for additional information about the United Insurance advances and related funding agreements. Common Stock Repurchases On May 6, 2020, Kemper’s Board of Directors authorized the repurchase of up to an additional $200.0 million of Kemper common stock, in addition to the $133.3 million remaining under the previous authorization. The Company repurchased approximately $161.7 million and $110.4 million of stock at an average cost per share of $77.58 and $68.29 in 2021 and 2020, respectively. As of December 31, 2021, the remaining share repurchase authorization was $171.6 million under the repurchase program. The amount and timing of any future share repurchases under the authorization will depend on a variety of factors, including market conditions, the Company’s financial condition, results of operations, available liquidity, particular circumstances and other considerations. Dividends to Shareholders Kemper paid a quarterly dividend of $0.31 per common share for each quarter of 2021 and $0.30 per common share for each quarter of 2020, respectively. Dividends and dividend equivalents paid were $80.6 million and $78.9 million for the years ended December 31, 2021 and 2020, respectively. 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 $347.0 million, $322.0 million and $239.0 million in dividends to Kemper in 2021, 2020 and 2019, respectively. In 2022, Kemper estimates that its direct insurance subsidiaries would be able to pay approximately $191.2 million in dividends to Kemper without prior regulatory approval. Kemper made capital contributions to insurance subsidiaries of $126 million and $62 million during 2021 and 2020, respectively. Sources and Uses of Funds Kemper directly held cash and investments totaling $233.9 million at December 31, 2021, compared to $733.2 million at December 31, 2020. The primary sources of funds available for repayment of Kemper’s indebtedness, repurchases of common stock, future shareholder dividend payments and the payment of interest on Kemper’s senior notes, 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. 58 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) LIQUIDITY AND CAPITAL RESOURCES (Continued) 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 Chicago, Dallas and San 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 of Chicago, Dallas and San 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 the years ended December 31, 2021, 2020 and 2019 is presented below. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","2021","","2020","","2019"],["Operating Activities","","$","350.7","","","$","448.0","","","$","534.3"],["Investing Activities","","(118.2)","","","(757.0)","","","(633.4)"],["Financing Activities","","(290.4)","","","378.3","","","160.8"]] [[/GREPCENT_TABLE]] 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 from Operating Activities The Company generated $350.7 million of net cash from operating activities during 2021 compared to $448.0 million in 2020, a decrease of $97.3 million. Cash from operating activities decreased primarily due to higher paid losses within the P&C business in 2021 due to an increase in frequency and rising loss costs from increased severity trends caused by rising inflation and supply chain constraints. This is partially offset by higher premium collections due to increased volume and a decrease in income taxes paid due to lower net income and tax credits generated from the Company’s investment in Alternative Energy Partnerships. Cash used by Investing Activities Net cash used by Investing Activities was $118.2 million in 2021, compared to $757.0 million in 2020, a year over year decrease of $638.8 million. This was driven primarily by higher net sales of short-term investments in 2021. In 2020, the Company purchased short-term investments toward the end of the year in anticipation of the purchase of AAC, which were subsequently liquidated prior to the purchase. This is partially offset by the purchase of AAC and net purchases of fixed maturities to support the growth in P&C business. Cash used by Financing Activities Net cash used by financing activities in 2021 was $290.4 million, compared to cash provided by financing activities of $378.3 million in 2020, a year over year change of $668.7 million. In 2021, the Company used cash to repay the $50.0 million term loan and also repurchase a greater amount of shares. Cash provided by financing activities in 2020 consisted of $395.6 million of proceeds from the issuance of the senior debt as well as $169.4 million higher proceeds from Policyholder Obligations for the FHLB spread lending program. 59 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) CONTRACTUAL OBLIGATIONS Estimated cash disbursements pertaining to the Company’s contractual obligations at December 31, 2021 are presented below. [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","Jan 1, 2022 to Dec 31, 2022","","Jan 1, 2023 to Dec 31, 2024","","Jan 1, 2025 to Dec 31, 2026","","After Dec 31, 2026","","Total"],["Long Term Debt Obligations","","$","275.0","","","$","\u2014","","","$","450.0","","","$","400.0","","","$","1,125.0"],["Life and Health Insurance Policy Benefits","","346.8","","","577.7","","","548.4","","","8,432.4","","","9,905.3"],["Property and Casualty Insurance Reserves","","1,933.7","","","660.6","","","134.9","","","43.5","","","2,772.7"],["Total Contractual Obligations","","$","2,555.5","","","$","1,238.3","","","$","1,133.3","","","$","8,875.9","","","$","13,803.0"]] [[/GREPCENT_TABLE]] Amounts included in Life and Health Insurance Policy Benefits within the contractual obligations table above represent the estimated cash payments to be made to policyholders and beneficiaries. Such cash outflows are based on the Company’s current assumptions for mortality, morbidity and policy lapse, but are undiscounted with respect to interest. Policies must remain in force for the policyholder or beneficiary to receive the benefit under the policy. Depending on the terms of a particular policy, future premiums from the policyholder may be required for the policy to remain in force. The Company estimates that future cash inflows would total $5.7 billion using the same assumptions used to estimate the cash outflows. The Company’s Life Insurance Reserves in the Company’s Consolidated Balance Sheets are generally based on the historical assumptions for mortality and policy lapse rates and are on a discounted basis. Accordingly, the sum of the amounts presented above for Life and Health Insurance Policy Benefits significantly exceeds the amount of Life and Health Insurance Reserves reported on the Company’s Consolidated Balance Sheet at December 31, 2021. In addition to the purchase obligations included above, the Company had certain investment commitments totaling $300.8 million at December 31, 2021. The funding of such investment commitments is dependent on a number of factors, the timing of which is indeterminate. The Company cannot make a reasonably reliable estimate of the amount and period of related future payments, if any, for such liability. 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. Valuation of Investments The reported value of the Company’s investments was $10,387.4 million at December 31, 2021, of which $8,863.9 million, or 85%, was reported at fair value, $281.5 million, or 3%, was reported under the equity method of accounting, $383.0 million, or 4%, was reported at unpaid principal balance and $859.0 million, or 8%, was reported at cost, modified cost or depreciated cost. Investments, in general, are exposed to various risks, such as interest rate risk, credit risk and overall market volatility risk. Accordingly, it is reasonably possible that changes in the fair values of the Company’s investments reported at fair value will occur in the near term and such changes could materially affect the amounts reported in the financial statements. Also, it is reasonably possible that changes in the carrying values of the Company’s Equity Method Limited Liability Investments will occur in the near term and such changes could materially affect the amounts reported in the financial statements because these issuers follow specialized industry accounting rules which require that they report all of their investments at fair value (See Item 1A., “Risk Factors” under the title “The Company’s investment portfolio is exposed to a variety of risks that may negatively impact net investment income and cause realized and unrealized losses”). 60 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) CRITICAL ACCOUNTING ESTIMATES (Continued) As more fully described under the heading, “Fair Value Measurements,” in Note 2, “Summary of Accounting Policies and Accounting Changes,” to the Consolidated Financial Statements, the Company uses a hierarchical framework which prioritizes and ranks the market observability used in fair value measurements. The fair value of the Company’s investments measured and reported at fair value was $8,863.9 million at December 31, 2021, of which $8,287.5 million, or 93%, were investments that were based on quoted market prices or significant value drivers that are observable, $251.4 million, or 3%, were investments where at least one significant value driver was unobservable and $325.0 million or 4% were investments for which fair value is measured using the net asset value per share practical expedient. Fair value measurements based on readily available, active, quoted market prices or for which fair value can be measured from actively quoted prices generally are deemed to have a higher degree of market price observability and a lesser degree of judgment, compared to fair value measurements based on significant unobservable inputs used in measuring fair value. The prices that the Company might realize from actual sales of investments are likely to vary from their respective estimated fair values at December 31, 2021 due to changing market conditions and limitations inherent in the estimation process. The classification of a company’s investment in a financial instrument may affect its reported results. Under GAAP, a company may elect to use the fair value option method of accounting for some or all of its investments in financial instruments. Under the fair value option method of accounting, a company is required to recognize changes in fair values into income for the period reported. The Company has elected the fair value option for investments in fixed maturities with equity conversion features which are recorded on the Consolidated Balance Sheets as Convertible Securities. Accordingly, both the reported and fair values of the Company’s investments in Convertible Securities accounted for under the fair value option method of accounting were $46.4 million at December 31, 2021. For investments in fixed maturities classified as held to maturity, a company is required to carry the investment at amortized cost, with only amortization occurring during the period recognized into income. None of the Company’s investments in fixed maturities were classified as held to maturity at December 31, 2021. Changes in the fair value of investments in fixed maturities classified as available for sale are not recognized in income during the period, but rather are recognized as a separate component of Accumulated Other Comprehensive Income (“AOCI”) until realized. Both the reported and fair values of the Company’s investments in fixed maturities classified as available for sale were $7,986.9 million at December 31, 2021. Equity securities with readily determinable fair values are recorded as Equity Securities at Fair Value with changes in fair values recognized into income for the period reported. Accordingly, both the reported and fair values of the Company’s investments in Equity Securities at Fair Value were $830.6 million at December 31, 2021. The Company holds certain equity investments without readily determinable fair values at cost, less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments from the same issuer. Changes in the carrying value of Equity Securities at Modified Cost due to observable price changes are recorded into income for the period reported. The Company’s portfolio also includes investments in Alternative Energy Partnerships that are accounted for under the Hypothetical Liquidation at Book Value (“HLBV”) method. Under the HLBV method, the amounts of income and loss attributed to investors reflect changes in the amounts the fund investors would hypothetically receive at each balance sheet date under the liquidation provisions of the contractual agreements of these funds. Attributing income and loss under the HLBV method requires the use of significant assumptions and forecasts to calculate the amounts that fund investors would receive upon a hypothetical liquidation. See Note 1 “Basis of Presentation and Significant Estimates,” to the Consolidated Financial Statements for additional information. Had the Company elected the fair value option for all of its investments in financial instruments, the Company’s reported net loss for the year ended December 31, 2021, would have increased by $226.4 million. The Company regularly reviews its fixed maturity investment portfolio and holdings in Equity Securities at Modified Cost for factors that may indicate a decline in the fair value of an investment below its amortized cost or modified cost basis. Such reviews are inherently uncertain in that the value of the investment may not fully recover or may decline further in future periods. Some factors considered in evaluating whether or not a decline in fair value of an investment exist include, but are not limited to, the following: Fixed Maturity Securities •The financial condition, credit rating and prospects of the issuer; •The magnitude of the unrealized loss; 61 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) CRITICAL ACCOUNTING ESTIMATES (Continued) •The ability of the issuer to make scheduled principal and interest payments; •The volatility of the investment; Equity Securities at Modified Cost •Opinions of the Company’s external investment managers; •The financial condition and prospects of the issuer; •Current market conditions; •Changes in credit ratings; and •Changes in the regulatory environment. Changes in these factors from their December 31, 2021 evaluation date could result in the Company determining that a decline in the fair value exists for an investment held and evaluated at December 31, 2021. Such determination would result in an impairment loss in the period such determination is made. Property and Casualty Insurance Reserves for Losses and Loss Adjustment Expenses The Company’s Property and Casualty Insurance Reserves are reported using the Company’s estimate of its ultimate liability for losses and LAE for claims that occurred prior to the end of any given accounting period but have not yet been paid. The Company had $2,772.7 million and $1,982.5 million of gross loss and LAE reserves at December 31, 2021 and 2020, respectively. Property and Casualty Insurance Reserves for the Company’s business segments at December 31, 2021 and 2020 were: [[GREPCENT_TABLE]] [["DOLLARS IN MILLIONS","","2021","","2020"],["Business Segments:"],["Specialty Property & Casualty Insurance","","$","2,319.7","","","$","1,544.8"],["Preferred Property & Casualty Insurance","","433.2","","","411.6"],["Life & Health Insurance","","3.6","","","4.6"],["Total Business Segments","","2,756.5","","","1,961.0"],["Unallocated Reserves","","16.2","","","21.5"],["Total Property and Casualty Insurance Reserves","","$","2,772.7","","","$","1,982.5"]] [[/GREPCENT_TABLE]] In estimating the Company’s Property and Casualty Insurance Reserves, the Company’s actuaries exercise professional judgment and must consider, and are influenced by, many variables that are difficult to quantify. Accordingly, the process of estimating and establishing the Company’s Property and Casualty Insurance Reserves is inherently uncertain, and the actual ultimate cost of known and unknown claims may vary materially from the estimated amounts reserved. The Company’s actuaries estimate reserves at least quarterly for most product lines and/or coverage levels using accident quarters or years spanning 10 or more years, depending on the product line and/or coverage level or emerging issues relating to them. The Company’s actuaries use a variety of generally accepted actuarial loss reserving estimation methodologies, including, but not limited to, the following: •Incurred Loss Development Methodology; •Paid Loss Development Methodology; •Bornhuetter-Ferguson Incurred Loss Methodology; •Bornhuetter-Ferguson Paid Loss Methodology; and •Frequency and Severity Methodology. The Company’s actuaries generally review the results of at least four of the estimation methodologies, two based on paid data and two based on incurred data, to initially estimate the ultimate losses and LAE for the current accident quarter or year and re-estimate the ultimate losses and LAE for previous accident quarters or years to determine if changes in the previous estimates of the ultimate losses and LAE are indicated by the most recent data. In some cases, the methodologies produce a cluster of estimates with a tight band of indicated possible outcomes. In other cases, however, the methodologies produce conflicting results and wider bands of indicated possible outcomes, and the Company’s actuaries perform additional analyses before 62 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) CRITICAL ACCOUNTING ESTIMATES (Continued) making their final selections. However, such bands do not necessarily constitute a range of outcomes, nor does the Company’s management or the Company’s actuaries calculate a range of outcomes. The key assumption in these estimation methodologies is that patterns observed in prior periods are indicative of how losses and LAE are expected to develop in the future and that such historical data can be used to predict and estimate ultimate losses and LAE. However, changes in the Company’s business processes, by their very nature, are likely to affect the development patterns, which means the Company’s actuaries must routinely make assumptions about how changes in business practices would affect historical patterns. The ultimate impact of a single change in a business process is difficult to quantify and detect, and even more difficult if several changes to business processes occur over several years. Initially after a change is implemented, there are fewer data points, as compared to the historical data, for the Company’s actuaries to analyze. With fewer data points to analyze, the Company’s actuaries cannot be certain that observed differences from the historical data trends are a result of the change in business process or merely a random fluctuation in the data. As the Company’s actuaries observe more data points following the change in business process, the Company’s actuaries can gain more confidence in whether the change in business process is affecting the development pattern. The challenge for the Company’s actuaries is how much weight to place on the development patterns based on the older historical data and how much weight to place on the development patterns based on more recent data. For each accident quarter or year, the point estimate selected by the Company’s actuaries is not necessarily one of the points produced by any particular one of the methodologies utilized, but often is another point selected by the Company’s actuaries, using their professional judgment, that takes into consideration each of the points produced by the several loss reserving estimation methodologies used. In some cases, for a particular product, the current accident quarter or year may not have enough paid claims data to rely upon, leading the Company’s actuaries to conclude that the incurred loss development methodology provides a better estimate than the paid loss development methodology. Therefore, the Company’s actuaries may give more weight to the incurred loss development methodology for that particular accident quarter or year. As an accident quarter or year ages for that same product, the actuary may gain more confidence in the paid loss development methodology and begin to give more weight to the paid loss development methodology. The Company’s actuaries’ quarterly selections are summed by product and/or coverage levels to create the actuarial indication of the ultimate losses. More often than not, the actuarial indication for a particular product line and accident quarter or year is most heavily weighted toward the incurred loss development methodology, particularly for short-tail lines such as personal automobile insurance. Historically, the incurred loss development methodology has been more reliable in predicting ultimate losses for short-tail lines, especially in the more recent accident quarters or years, compared with the paid loss development methodology. However, in some circumstances changes can occur which impact numerous variables, including, but not limited to, those variables identified below that are difficult to quantify and/or impact the predictive value of prior development patterns relied upon in the incurred loss development methodology and paid loss development methodology. In those circumstances, the Company’s actuaries must make adjustments to these loss reserving estimation methodologies or use additional generally accepted actuarial estimation methodologies. In those circumstances, the Company’s actuaries, using their professional judgment, may place more weight on the adjusted loss reserving estimation methodologies or other generally accepted actuarial estimation methodologies until the newer development patterns fully emerge and the Company’s actuaries can fully rely on the unadjusted loss reserving estimation methodologies. In the event of a wide variation among results generated by the different projection methodologies, the Company’s actuaries further analyze the data using additional techniques. In estimating reserves, the Company’s actuaries exercise professional judgment and must consider, and are influenced by, many variables that are difficult to quantify, such as: •Changes in the level of minimum case reserves, and the automatic aging of those minimum case reserves; •Changes to claims practices, including, but not limited to, changes in the reporting and impact of large losses, timing of reported claims, changes in claims closing and re-opening patterns, adequacy of case reserves, implementation of •new systems for handling claims, turnover of claims department staffs, timing and depth of the audit review of claims handling procedures; •Changes in the mix of business by state, class and policy limit within product line; •Growth in new lines of business; •Changes in the attachment points of the Company’s reinsurance programs; •Medical costs, including, but not limited to, the ability to assess the extent of injuries and the impact of inflation; •Repair costs, including, but not limited to, the impact of inflation and the availability of labor and materials; •Changes in the judicial environment, including, but not limited to, the interpretation of policy provisions, the impact of jury awards and changes in case law; and 63 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) CRITICAL ACCOUNTING ESTIMATES (Continued) •Changes in state regulatory requirements. A change in any one or more of the foregoing factors is likely to result in a projected ultimate net loss and LAE that is different from the previously estimated reserve and/or previous frequency and severity trends. Such changes in estimates may be material. For example, the Company’s actuaries review frequency (number of claims per policy or exposure), severity (dollars of loss per claim) and average premium (dollars of premium per exposure). Actual frequency and severity experienced will vary depending on changes in mix by class of insured risk. Similarly, the actual frequency and rate of recovery from reinsurance will vary depending on changes in the attachment point for reinsurance. In particular, in periods of high growth or expansion into new markets, there may be additional uncertainty in estimating the ultimate losses and LAE. The contributing factors of this potential risk are changes in the Company’s mix by policy limit and mix of business by state or jurisdiction. Actuaries use historical experience and trends as predictors of how losses and LAE will emerge over time. However, historical experience may not necessarily be indicative of how actual losses and LAE will emerge. Changes in case reserve adequacy, changes in minimum case reserves and changes in internal claims handling procedures could impact the timing and recognition of incurred claims and produce an estimate that is either too high or too low if not adjusted for by the actuary. For example, if, due to changes in claims handling procedures, actual claims are settled more rapidly than they were settled historically, the estimate produced by the paid loss development methodology would tend to be overstated if the actuary did not identify and adjust for the impact of the changes in claims handling procedures. Similarly, if, due to changes in claims handling procedures, actual claim reserves are set at levels higher than past experience, the estimate produced by the incurred loss development methodology would tend to be overstated if the actuary did not identify and adjust for the impact of the changes in claims handling procedures. The final step in the quarterly loss and LAE reserving process involves a comprehensive review of the actuarial indications by the Company’s chief reserving actuary and corporate management who apply their collective judgment and determine the appropriate estimated level of reserves to record. Numerous factors are considered in this determination process, including, but not limited to, the assessed reliability of key loss trends and assumptions that may be significantly influencing the current actuarial indications, changes in claim handling practices or other changes that affect the timing of payment or development patterns, changes in the mix of business, the maturity of the accident quarter or year, pertinent trends observed over the recent past, the level of volatility within a particular line of business, the improvement or deterioration of actuarial indications in the current period as compared to prior periods, and the amount of reserves related to third party pools for which the Company does not have access to the underlying data and, accordingly, relies on calculations provided by such pools. Estimated Variability of Property and Casualty Insurance Reserves The Company’s goal is to ensure that its total reserves for property and casualty insurance losses and LAE are adequate to cover all costs, while sustaining minimal variation from the time reserves for losses and LAE are initially estimated until losses and LAE are fully paid. Changes in the Company’s estimates of these losses and LAE over time, also referred to as “development,” will occur and may be material. Favorable development is recognized and reported in the Consolidated Financial Statements when the Company decreases its previous estimate of ultimate losses and LAE and results in an increase in net income in the period recognized, whereas adverse development is recognized and reported in the Consolidated Financial Statements when the Company increases its previous estimate of ultimate losses and LAE and results in a decrease in net income. Although development will emerge in all of the Company’s product lines, development in the Company’s specialty personal automobile insurance product line could have the most significant impact due to the relative size of its loss and LAE reserves. To further illustrate the sensitivity of the Company’s reserves for specialty personal automobile insurance losses and LAE, the Company measures the standard deviation of the mean reserve estimate using a bootstrapping methodology. The Company believes that one standard deviation of variability is a reasonably likely scenario to measure variability for its loss and LAE reserves for specialty personal automobile insurance. The Company estimates that the Company’s specialty personal automobile insurance loss and LAE reserves could have varied by $145.3 million in either direction at December 31, 2021 for all accident years combined under this scenario. In addition to the factors described above, other factors may also impact loss reserve development in future periods. These factors include governmental actions, including court decisions interpreting existing laws, regulations or policy provisions, developments related to insurance policy claims and coverage issues, adverse or favorable outcomes in pending claims litigation, the number and severity of insurance claims, the impact of inflation on insurance claims and the impact of required participation in windpools and joint underwriting associations and residual market 64 Kemper Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) CRITICAL ACCOUNTING ESTIMATES (Continued) assessments. Although the Company’s actuaries do not make specific numerical assumptions about these factors, changes in these factors from past patterns will impact historical loss development factors and, in turn, future loss reserve development. Significant favorable changes in one or more factors will lead to favorable future loss reserve development, which could result in the actual loss developing closer to, or even below, the lower end of the Company’s estimated reserve variability. Significant unfavorable changes in one or more factors will lead to unfavorable loss reserve development, which could result in the actual loss developing closer to, or even above, the higher end of the Company’s estimated reserve variability. Accordingly, due to these factors and the other factors enumerated throughout the MD&A and the inherent limitations of the loss reserving estimation methodologies, the estimated and illustrated reserve variability may not necessarily be indicative of the Company’s future reserve variability, which could ultimately be greater than the estimated and illustrated variability. In addition, as previously noted, development will emerge in all of the Company’s product lines over time. Accordingly, the Company’s future reserve variability could ultimately be greater than the illustrated variability. Additional information pertaining to the estimation of, and development of, the Company’s Property and Casualty Insurance Reserves is contained in Item 1 of Part I of this 2021 Annual Report under the heading “Property and Casualty Loss and Loss Adjustment Expense Reserves.” Goodwill Recoverability The Company tests goodwill for recoverability at the reporting unit level on an annual basis, or whenever events or circumstances indicate the fair value of a reporting unit may have declined below its carrying value. The Company performed a qualitative goodwill impairment assessment for all reporting units with goodwill as of October 1, 2021. The qualitative assessment takes into consideration changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy, events impacting reporting units, and changes in Kemper’s stock price since the last quantitative assessment, which was performed on December 31, 2017. Based on its qualitative assessment, the Company concluded that the associated goodwill was recoverable for each reporting unit tested. Pension Benefit Obligations The process of estimating the Company’s pension benefit obligations and pension benefit costs is inherently uncertain and the actual cost of benefits may vary materially from the estimates recorded. These liabilities are particularly volatile due to their long-term nature and are based on several assumptions. The main assumptions used in the valuation of the Company’s pension benefit obligations and pension costs are: •Estimated mortality of the participants and beneficiaries eligible for benefits; •Estimated expected long-term rates of returns on investments; and •Estimated rate used to discount the expected benefit payment to a present value. A change in any one or more of these assumptions is likely to result in a projected benefit obligation or pension cost that differs from the actuarial estimates at December 31, 2021. Such changes in estimates may be material. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, the FASB Accounting Standards Codification (“ASC”) is the sole source of authoritative GAAP recognized by the Financial Accounting Standards Board (“FASB”) that is applicable to the Company. The FASB issues ASUs to amend the authoritative literature in ASC. The Company has adopted all recently issued accounting pronouncements with effective dates prior to January 1, 2022. See Note 2, “Summary of Accounting Policies and Accounting Changes” to the Consolidated Financial Statements for discussion on adoption of these ASUs and impacts to the Company’s financial statements, which were not material. For all recently issued accounting pronouncements with effective dates after December 31, 2021, the Company does not expect adoption to have a material impact on its financial statements, with the possible exception of ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to Accounting for Long-Duration Contracts. 65