Kemper Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Comparisons are with Q1 2017 unless stated otherwise. Dollar amounts are in millions, except per-share data and ratios.
Business context and results
Kemper operates Property & Casualty (P&C) and Life & Health (L&H) insurance businesses. Net income was $53.8, or $1.03 per diluted unrestricted share, versus a $0.3 net loss, or $0.01 loss per share. Continuing-operations income was $53.6 versus a $0.4 loss. Adjusted consolidated net operating income, a non-GAAP measure, was $57.5 versus a $3.9 loss.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Earned premiums | $609.8 | $563.4 |
| Total revenues | $693.0 | $651.4 |
| Net investment income | $79.2 | $81.6 |
| Total expenses | $626.0 | $654.9 |
| Income (loss) before income taxes, continuing operations | $67.0 | $(3.5) |
| Net cash from operating activities | $74.0 | $48.3 |
| Net cash used by investing activities | $(2.0) | $(32.7) |
| Cash at period end | $115.4 | $120.0 |
Consolidated total assets were $8,371.0 at March 31, 2018, versus $8,376.2 at year-end 2017. Total liabilities were $6,307.2 and shareholders’ equity was $2,063.8. Debt at amortized cost was $592.3, unchanged from year-end; its reported fair value was $606.0. The company also had $10.0 of short-term FHLB advances, recorded in accrued expenses and other liabilities, secured by securities with a fair value of $17.7. No borrowings were outstanding under its $225.0 revolving credit facility. Kemper directly held cash and investments of $184.4, compared with $197.3 at year-end.
The quarterly dividend remained $0.24 per share. Insurance subsidiaries could pay an estimated additional $201.0 in dividends to the parent during the remainder of 2018 without prior regulatory approval.
Material changes and operating performance
- Earned premiums increased $46.4, led by P&C growth of $44.8. P&C premium growth was driven principally by nonstandard personal auto volume and higher average premiums.
- P&C segment net operating income improved to $36.0 from a $22.1 loss. Its combined ratio improved to 95.2% from 115.0%; the underlying combined ratio improved to 94.1% from 96.8%.
- The P&C improvement reflected catastrophe losses and LAE of $7.5 versus $63.9, favorable prior-year reserve development of $2.0 versus adverse development of $10.6, and a lower underlying loss ratio. Homeowners underlying losses deteriorated, however, with the ratio rising to 57.0% from 50.9%.
- L&H segment net operating income rose to $23.8 from $21.5, primarily reflecting the lower tax rate, while policyholder benefits and incurred losses increased. Management reported elevated life claims early in the quarter, returning toward historical levels by quarter-end.
- Net investment income declined $2.4, mainly because of lower returns and investment levels in alternative investments. Net realized investment gains fell to $2.6 from $10.5; impairment losses narrowed to $0.5 from $5.0.
- Other comprehensive income was a loss of $95.7, largely from unrealized investment losses, versus income of $17.1. Total comprehensive income was a loss of $41.9 despite positive net income. AOCI fell to $116.9 from $194.4 at year-end.
Outlook, transactions, risks and unusual items
- Infinity acquisition: Kemper agreed to acquire Infinity Property and Casualty Corporation in a cash-and-stock transaction valued at approximately $1.4 billion, plus assumption of certain debt. The merger was expected to close in Q3 2018, subject to shareholder and regulatory approvals and other conditions. FTC early termination of the Hart-Scott-Rodino waiting period had been received. Kemper expected to fund the cash portion with cash on hand and other internal resources and was exploring an institutional term loan to optimize liquidity. Q1 included $6.2 of acquisition-related transaction and integration costs.
- Contingency: A 2017 arbitration award granted Kemper’s subsidiary $84.3 in damages, 9% prejudgment interest, and $7.2 in costs in its dispute with CSC/DXC Technology. DXC sought to vacate the award; confirmation and vacatur proceedings were pending. Kemper treated the award as a gain contingency and recognized no amount in the financial statements; collection and final judgment were uncertain.
- Insurance and liquidity risks: Results remain exposed to catastrophe frequency and severity, reserve-estimate revisions, claims inflation, investment-market movements, reinsurance availability, regulation and litigation. Management cautioned that reserve development could materially affect a period’s results even if it did not materially affect consolidated equity. The company stated it believed its P&C subsidiaries maintained adequate liquidity for multiple catastrophe events.
- Accounting change: Adoption of ASU 2016-01 moved equity investment fair-value changes into earnings; management anticipated greater income-statement volatility. The company also adopted ASU 2018-02 to reclassify tax effects within equity, with no effect on total shareholders’ equity. The 2017 Tax Act’s deferred-tax effects remained provisional; the company expected to complete its assessment in Q4 2018.
- No specific earnings or financial guidance is provided in the supplied filing text. The company said interim results warrant caution because insurance results are seasonal and depend on estimates and market conditions.
Important facts for investors to verify
- Whether Infinity’s remaining shareholder and regulatory approvals were obtained, and whether the transaction closed on the expected terms, timetable and financing plan.
- Subsequent developments, enforceability and collection prospects for the DXC arbitration award; it was not booked as an asset or gain.
- Whether P&C underwriting improvement persists after accounting for unusually low catastrophe losses versus Q1 2017, and whether homeowners loss trends and reserve development change.
- The performance and valuation sensitivity of alternative investments and equity securities, including the impact of the new accounting treatment on reported earnings and equity.
- Final tax-accounting effects of the Tax Act and the company’s evolving life-insurance death-verification and beneficiary outreach obligations.