Kemper Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. Kemper operates Property & Casualty (P&C) and Life & Health insurance businesses. Financial amounts are in millions except per-share data.
Financial results and key metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenues | $499.2 | $554.6 |
| Income from continuing operations | $13.5 | $35.2 |
| Net income | $13.5 | $35.1 |
| Diluted earnings per share | $0.26 | $0.63 |
| Net operating income (non-GAAP) | $21.8 | $31.5 |
| Net cash from operating activities | $29.0 | $37.1 |
- Earned premiums fell to $431.3 from $477.6. Net investment income was $70.6, versus $71.1; realized investment gains were $3.4, versus $6.6.
- Other-than-temporary investment impairment losses recognized in earnings increased to $7.0 from $0.8. Total expenses were $481.4, including a $9.1 pretax loss on early debt extinguishment.
- P&C segment net operating income was $13.4, down from $14.4; Life & Health was $16.1, down from $22.1. P&C combined ratio improved to 99.0% from 99.5%; its underlying combined ratio improved to 97.9% from 99.2%.
- Q1 comprehensive income was $51.1, compared with $114.0, reflecting lower unrealized investment gains in other comprehensive income.
- At March 31, total assets were $7,885.0, shareholders’ equity $2,109.9, cash $87.7 and total investments $6,461.4. Debt was $750.0 at amortized cost; the reported fair value of debt was $804.1. The $225 million revolving credit facility had no outstanding borrowings.
- Quarter-end cash increased $11.6 from year-end. Investing activities provided $27.7; financing activities used $45.1, including $279.3 of debt repayments, $23.4 of share repurchases and $12.3 of dividends.
Material changes and management commentary
- Management attributed the $46.3 premium decline primarily to lower P&C volume, especially personal auto and homeowners, and lower Life & Health premiums. P&C rate and segmentation actions had lifted average premium but contributed to lower new business and retention; management said recent moderation of rate increases accompanied improving new-business growth and retention, but further improvement was needed to stabilize and grow premiums.
- P&C underlying losses improved, and catastrophe losses excluding reserve development declined to $10.3 from $16.0. Favorable prior-year P&C reserve development was $7.4, less than the $15.0 favorable development in Q1 2014.
- Life & Health earned premiums included a $7.6 adjustment to correct deferred premium reserves on certain limited-pay life policies. The segment’s operating profit fell to $24.8 from $34.6; higher life benefits partly offset lower accident-and-health losses.
- Investment income from equity-method limited-liability investments declined by $4.2, partly offset by higher fixed-maturity income. Management reported that 92% of fixed-maturity investments were investment grade.
- Kemper issued $250 million of 4.35% senior notes due 2025, with a 4.49% effective yield, and used proceeds plus cash to redeem $250 million of 6.00% notes due 2015. The refinancing produced the $9.1 pretax extinguishment loss.
- The company repurchased 0.6 million shares for $21.9 million during the quarter under its $300 million authorization and paid a $0.24 quarterly dividend per share.
- After quarter-end, Kemper completed its acquisition of Alliance United on April 30 for $70.3 million, subject to adjustments, and contributed $75 million to support the acquired business. Also after quarter-end, insurance subsidiaries paid Kemper dividends of $192 million and $43 million, respectively; the $192 million extraordinary dividend was approved by the regulator.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management cautions that interim insurance results are affected by seasonality, estimates and market conditions.
- A central uncertainty is state and regulatory action concerning life insurers’ use of death-record databases and unclaimed property practices. Related audits, examinations and litigation could require retroactive changes to policy administration, accelerate benefit or escheatment payments, increase claims-handling costs and adversely affect earnings, financial position and cash flows. The company says it cannot reasonably estimate a potential loss.
- Other disclosed risks include catastrophe frequency and severity, adequacy of insurance reserves, investment market and interest-rate movements, competition, regulation, reinsurance availability, and operational and data-security risks. A hypothetical 100-basis-point rate increase and 30% equity-price decline were estimated to reduce the fair value of relevant assets by $479.3 million in aggregate before considering liability offsets and other effects; the filing cautions this is a sensitivity illustration, not a forecast.
- Management expects a $2.3 million income-tax benefit in Q2 2015 following resolution of specified federal tax years. The filing also notes approximately $153.5 million of unfunded investment commitments, expected to be funded over several years.
Most important facts for investors to verify
- Whether premium volume and policy retention stabilize, especially in personal auto and homeowners, and whether P&C underwriting improvements persist.
- Whether Life & Health results normalize after the deferred-premium adjustment and how benefit costs and product run-off evolve.
- The development of prior-year reserves, catastrophe claims and the adequacy of insurance reserves.
- Outcomes of unclaimed-property litigation and regulatory initiatives, including any effect on benefit-payment timing, costs, cash flows or reserves.
- Integration, funding and performance of Alliance United, along with post-quarter subsidiary dividends and remaining parent-company liquidity.
- Investment impairment, valuation and interest-rate exposures, and the effect of refinancing and future capital returns on debt, earnings and cash.