Kemper Corporation (KMPR) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 3, 2020. Unaudited consolidated results. Kemper operates Specialty Property & Casualty, Preferred Property & Casualty, and Life & Health insurance businesses.
Financial results and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $1,230.9m | $1,275.4m | $2,459.9m | $2,511.7m |
| Net income | $126.1m | $122.1m | $190.1m | $277.4m |
| Diluted EPS | $1.91 | $1.84 | $2.85 | $4.20 |
| Net investment income | $67.8m | $96.0m | $153.4m | $178.7m |
| Operating cash flow | Not separately stated for the quarter | $263.8m | $236.5m |
For the six-month period, adjusted consolidated net operating income, a non-GAAP measure, was $242.1m versus $190.4m. The filing does not provide a single consolidated operating-margin figure. Specialty P&C’s combined ratio was 92.9% for six months (91.5% prior year); Preferred P&C’s was 97.1% (102.9% prior year). Lower ratios generally indicate better underwriting results.
At June 30, 2020, total assets were $13.49bn, shareholders’ equity $4.19bn, and cash $389.3m. Long-term debt was $777.7m, largely unchanged from year-end 2019; no borrowings were outstanding under the $400m revolving credit agreement. Insurance subsidiaries had $454.3m of FHLB funding agreements, collateralized by securities valued at $459.4m. Kemper reported $270.5m of cash and investments held directly by the parent.
Material changes and notable items
- Six-month net income declined $87.3m year over year, while Q2 net income rose $4.0m. The H1 decline chiefly reflected weaker investment results and higher acquisition, integration, and other costs.
- COVID-19 premium credits to personal auto policyholders totaled approximately $100m and reduced earned premiums in both Q2 and the first half. Excluding these credits, H1 earned premiums increased $160.3m year over year.
- Investment income fell $25.3m in H1. Equity and convertible securities generated a $46.2m fair-value loss for the six months, versus an $89.9m gain in 2019; Q2 alone recorded a $71.6m gain. Net realized investment gains were $28.2m in H1, while impairment losses were $19.0m.
- H1 property-and-casualty prior-year reserve development was adverse by $19.5m, compared with favorable development of $34.6m in 2019. Specialty personal auto had $29.3m adverse development; commercial auto had $14.2m favorable development.
- Other income included an $89.4m gain in H1 from final satisfaction of a judgment against DXC Technology (formerly CSC). This was a significant, non-recurring contributor to results.
- Other comprehensive income was $161.2m in H1, largely reflecting unrealized investment gains; accumulated other comprehensive income reached $497.3m at June 30.
- Operating cash flow was $263.8m; investing activities used $76.8m and financing activities provided $65.5m. The company repurchased $110.4m of shares and paid $39.7m in dividends during H1.
Outlook, risks and contingencies
The filing gives no quantified earnings or revenue guidance. Management said COVID-19 and related economic conditions began affecting results in March, including additional expenses and market disruption. It described future effects as highly uncertain.
- Risks include reduced premium volumes from economic weakness, investment credit deterioration and valuation volatility, changes in claim frequency or severity, and increased policyholder credit losses. Management also cited potential higher life claims from COVID-19; lower accident-and-health claim frequency partly offset this in the period.
- Remote work may heighten cybersecurity, data-protection, workforce, and critical-systems risks. Other identified uncertainties include catastrophe losses, reserve estimates, regulatory changes and the transition away from LIBOR after 2021.
- Potential life-policy obligations tied to death-verification initiatives remain uncertain. The company continues a voluntary process to compare records against death databases.
- The company adopted expected-credit-loss accounting in 2020 with no opening retained-earnings adjustment. Management said adoption of other new accounting guidance had no material effect; long-duration insurance accounting changes were still under evaluation.
Important facts for investors to verify
- Whether auto premium growth and underwriting performance persist after the approximately $100m of COVID-related credits, and how grace periods affect bad-debt expense.
- Further development of P&C reserves, particularly specialty and preferred personal auto, and the sustainability of lower claim frequency.
- Investment income, alternative-investment returns, credit impairments, and fair-value movements; the filing reports 93% of fixed maturities as investment grade.
- The continuing effects of COVID-19 on life mortality, sales, premiums, claims, liquidity, and investment holdings.
- Use of remaining share-repurchase authorization of approximately $333m, capital and dividend capacity at insurance subsidiaries, and collateral requirements for FHLB funding.
- Underlying results excluding the DXC judgment recovery and other investment gains or losses; adjusted operating income is non-GAAP and should be assessed alongside GAAP net income.