Kemper Corporation — Q1 2014 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2014, compared with the three months ended March 31, 2013. Kemper operates Property & Casualty (P&C) and Life & Health insurance businesses. In Q1 2014, it realigned P&C operations into one reporting segment and recast prior-period segment presentation.
Key financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Earned premiums | $477.6 million | $509.9 million |
| Total revenues | $554.6 million | $615.9 million |
| Income from continuing operations | $35.2 million | $58.6 million |
| Net income | $35.1 million | $58.4 million |
| Diluted earnings per unrestricted share | $0.63 | $1.00 |
| Consolidated net operating income (non-GAAP) | $31.5 million | $42.3 million |
| Net cash provided by operating activities | $37.1 million | $81.3 million |
- Revenue fell 10%; net income declined 40%. Lower premiums, net investment income and realized investment gains were the principal reported factors in the year-over-year earnings decline.
- Net investment income was $71.1 million, down from $80.8 million. Net realized investment gains were $6.6 million versus $26.9 million; Q1 2013 included $24.8 million of gains from corporate bond sales.
- Comprehensive income was $114.0 million versus $31.8 million, reflecting $120.0 million of pretax unrealized investment gains in other comprehensive income, compared with a $48.0 million unrealized loss in Q1 2013.
- P&C segment net operating income was $14.4 million, down from $29.0 million. Its combined ratio rose to 99.5% from 95.8%; underlying combined ratio was 99.2% versus 97.1%.
- P&C earned premiums declined $29.8 million, mainly from personal auto, where lower volume outweighed higher average premiums. Catastrophe losses and LAE rose to $16.0 million from $8.7 million. Prior-year P&C reserve development was favorable by $15.0 million, versus $13.3 million.
- Life & Health segment net operating income increased to $22.1 million from $21.2 million. Segment revenues fell to $205.5 million from $210.8 million, while lower policyholder benefits and insurance expenses supported earnings.
Balance sheet, debt and liquidity
- Total assets were $7.94 billion at March 31, 2014, up from $7.66 billion at year-end; shareholders’ equity was $2.14 billion, up from $2.05 billion.
- Investments totaled $6.46 billion, including $4.62 billion of fixed maturities. Cash was $65.0 million. Directly held parent-company cash and investments were $255.9 million, compared with $156.7 million at December 31, 2013.
- Debt at amortized cost increased to $751.4 million from $606.9 million. The increase principally reflects issuance of $150 million of 7.375% subordinated debentures due 2054; net proceeds were $144.2 million, at an effective yield of 7.69%. The $225 million revolving credit facility had no borrowings outstanding.
- Financing activities provided $123.6 million, largely from the debenture issuance; investing activities used $162.2 million. Cash decreased $1.5 million to $65.0 million. The quarterly dividend remained $0.24 per share.
- At March 31, 93% of fixed-maturity investments were rated investment grade. The company reported $116.1 million of unfunded commitments to limited liability investment companies and partnerships.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management cautions that interim insurance results can be seasonal and estimate-sensitive, and that actual loss experience may differ from reserve assumptions.
- The principal disclosed contingency is litigation, audits and regulatory initiatives concerning life insurers’ use of Social Security death records and unclaimed-property practices. Retroactive requirements could accelerate benefit payments or escheatment, increase claims-handling costs and materially adversely affect profitability, financial position and cash flows; the company says the potential loss cannot reasonably be estimated.
- Kemper was appealing Kentucky and Maryland rulings concerning death-file statutes; Maryland enforcement was not stayed and compliance had begun. Multi-state examinations and a 38-state treasurers’ audit were ongoing, along with related California and Illinois proceedings.
- Market risks include interest-rate and equity-price exposure. The filing’s illustrative stress analysis estimated that a 100-basis-point rate increase and a 30% equity-market decline would reduce relevant asset values, while a 100-basis-point rate decrease would increase the fair value of debt liabilities; these scenarios are not forecasts.
- Management reported disclosure controls as effective and no material quarterly change in internal control over financial reporting. The filing identifies no other significant change to previously disclosed risk factors.
Important facts for investors to verify
- Whether reduced P&C premiums and near-100% combined ratios persist, especially in personal auto and catastrophe-exposed homeowners business.
- Whether favorable prior-year reserve development continues and how future claims emergence affects reserves and reported earnings.
- Developments in death-file/unclaimed-property litigation, audits, state legislation and any resulting benefit-payment timing, costs or liabilities.
- Investment income and realized gains trends, portfolio credit quality, valuation of Level 3 investments and funding of the $116.1 million in unfunded commitments.
- Debt-service capacity and parent liquidity, including expected subsidiary dividends. The filing noted a $100 million Trinity dividend paid May 1, 2014, after quarter-end.