Kemper Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Kemper operates Property & Casualty and Life & Health insurance segments. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $684.4 | $627.2 | $1,335.8 | $1,238.5 |
| Net income | $36.6 | $4.0 | $36.3 | $1.9 |
| Diluted EPS | $0.71 | $0.08 | $0.70 | $0.04 |
| Net investment income | $77.1 | $73.7 | $158.7 | $140.7 |
| Net realized investment gains | $26.4 | $5.6 | $36.9 | $12.4 |
Six-month operating cash flow was $104.0, versus $116.9 in 2016. Investing activities provided $124.6, compared with $91.2 used in 2016; financing activities used $183.4, primarily reflecting debt repayment. Cash ended the period at $160.9, versus $115.7 at year-end 2016.
Total assets were $8,211.4 and shareholders’ equity was $2,033.4 at June 30. Long-term debt was $592.1, down from $751.6 at year-end 2016. Kemper issued $200.2 of net proceeds from additional 4.35% senior notes and repaid $360.0 of debt during the six months. Its $225.0 revolving credit facility had no borrowings outstanding.
Material changes and segment results
- Revenue and earnings increased substantially year over year, supported by premium growth, higher investment income, improved segment operating results, higher realized investment gains, and lower investment impairment losses. Net impairment losses were $7.6 for the six months, compared with $15.7 in 2016.
- Property & Casualty earned premiums increased to $839.6 for the six months. Segment net operating loss narrowed to $17.2 from $22.0. The six-month combined ratio was 109.3%, versus 109.0%; the underlying combined ratio improved to 95.5% from 100.3%. For Q2, the segment reported net operating income of $4.9 versus a loss of $8.9, and its combined ratio improved to 103.9% from 109.2%.
- Life & Health six-month segment net operating income rose to $42.0 from $36.7; Q2 income increased to $20.5 from $16.4. Higher investment income and premiums contributed to the six-month improvement.
- Net investment income rose by $18.0 for the six months, mainly from stronger alternative-investment returns and a higher level of fixed-income investments; lower fixed-income yields and equity dividends partly offset the increase.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management cautions that interim insurance results are affected by seasonality, market conditions and estimates.
- Property & Casualty reserves had $18.9 of adverse prior-year development in the six months, compared with $16.6 of favorable development in 2016. Personal automobile was the main source, including adverse development in preferred auto reserves; management notes reserve development could materially affect results for an individual period.
- Property & Casualty catastrophe losses, excluding prior-year reserve development, were $98.4 for the six months, versus $86.6 in 2016. Homeowners catastrophe losses increased year over year, although Q2 catastrophe losses declined from the prior-year quarter.
- Investment gains and alternative-investment returns are variable and may not recur. The company reported $36.9 of net realized gains for the first half, including substantial equity-security sale gains.
- Kemper began comparing life policies against death-verification databases in 2016 and expects the initial beneficiary outreach process to take several years. The filing describes uncertainty around state initiatives, audits, regulatory interpretations and related litigation; it does not provide a clear estimate of any ultimate financial impact.
- Other risks include catastrophe severity, reserve estimation, investment-market and interest-rate changes, regulation, litigation, competition and cybersecurity. Potential federal tax changes could reduce deferred tax asset values or affect insurance-subsidiary capital and investment tax advantages.
- At June 30, the company had $87.2 of unfunded commitments to equity-method investments and $127.2 of unfunded commitments to other limited-liability investments. It expects to fund these commitments over several years.
Investor verification priorities
- Assess whether earnings growth is repeatable without elevated realized investment gains and alternative-investment returns.
- Monitor auto loss trends and adverse reserve development, especially preferred personal automobile, and compare underlying ratios with reported combined ratios.
- Track catastrophe exposure and the effect of future severe events on underwriting results and liquidity.
- Review debt refinancing economics, parent-company liquidity, insurance-subsidiary dividend capacity and scheduled funding of investment commitments.
- Follow developments in death-verification requirements, unclaimed-property matters, litigation and potential tax-law changes.