Kemper Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; compared with Q1 2023 unless otherwise noted. Kemper operates Specialty Property & Casualty Insurance and Life Insurance businesses, alongside Non-Core Operations, which includes its Preferred Insurance business that it expects to exit.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / prior date |
|---|---|---|
| Total revenue | $1,143.0 million | $1,294.8 million |
| Net income (loss) attributable to Kemper | $71.3 million; $1.11 diluted EPS | $(80.1) million; $(1.25) diluted EPS |
| Adjusted consolidated net operating income (non-GAAP) | $69.7 million | $(55.7) million |
| Net cash from operating activities | $43.0 million | $5.2 million |
| Net cash from (used in) investing activities | $39.3 million | $(138.2) million |
| Net cash used in financing activities | $(19.7) million | $(18.8) million |
| Total assets | $12,625.9 million | $12,742.7 million at Dec. 31, 2023 |
| Total shareholders’ equity | $2,588.7 million | $2,505.0 million at Dec. 31, 2023 |
Earned premiums fell 12.6% to $1,031.9 million, primarily reflecting lower new business volumes in Specialty P&C and the run-off of Preferred Insurance. Net investment income was $100.4 million, down from $101.8 million. Consolidated total expenses were $1,056.4 million versus $1,398.7 million. The filing reports total revenue and expenses but does not present a consolidated profit margin.
Specialty P&C: Adjusted operating income was $86.5 million, versus a $74.7 million loss; adjusted net operating income was $69.2 million, versus a $58.4 million loss. The combined ratio improved to 94.8% from 112.1%; the underlying combined ratio improved to 93.6% from 108.0%. Earned premiums declined to $840.0 million from $944.2 million. Life: Adjusted operating income was $14.0 million versus $14.8 million; adjusted net operating income was $11.9 million versus $13.2 million.
At March 31, cash was $125.9 million on the balance sheet ($126.7 million including consolidated VIE cash). Management reported $395.6 million of cash and investments directly held by Kemper, versus $464.5 million at year-end. Total long-term debt was $1,389.8 million, including $449.7 million classified as current for 4.350% senior notes due February 2025. The company had $424.0 million available under its credit agreement and no borrowings under that agreement. Separately, insurance subsidiary FHLB funding agreements were $563.2 million, secured by $712.1 million of pledged collateral.
Material changes and management commentary
- Revenue decreased $151.8 million year over year, principally from lower earned premiums. Specialty P&C premium declines reflected targeted limits on new business to improve profitability; rate increases partly offset the volume reduction.
- Kemper’s earnings improved primarily with stronger Specialty P&C underwriting: management cited higher average earned premium per exposure, lower claim frequency and moderating severity increases. Specialty P&C current-year non-catastrophe losses were 72.5% of earned premiums, compared with 87.5%.
- Prior-year P&C reserve development was adverse by $8.8 million, improved from $41.9 million adverse in Q1 2023. Specialty personal auto had $7.1 million adverse development, primarily from higher-than-expected settlements on prior claims; commercial auto development was favorable by $1.1 million.
- Q1 2024 comprehensive income was $96.0 million, compared with a $19.9 million comprehensive loss. Other comprehensive income included a $141.1 million favorable change in the discount rate on future life policyholder benefits, partly offset by a $109.0 million decline in unrealized investment values before tax.
- Operating cash flow rose year over year, which management attributed to premium rate increases and lower claim frequency and payment timing. Q1 2023 operating cash flow included a $124.7 million federal tax refund.
- Insurance expenses fell to $240.7 million from $269.3 million, mainly due to lower business volumes. Acquisition, integration, restructuring and other costs were $12.8 million versus $29.1 million; Q1 2024 costs primarily included $12.1 million of IT integration expenses.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said its P&C subsidiaries maintain adequate liquidity to respond to multiple catastrophe events, but noted that declining premiums or significant catastrophe losses could require investment sales to fund claims. Insurance subsidiary capacity to pay dividends to Kemper without prior regulatory approval was estimated at zero as of the filing date.
- Key uncertainties include catastrophe frequency and severity, inflation and social inflation in claims, reserve-estimate changes, reinsurance availability and cost, and regulatory approval of insurance rates and products.
- Fixed-maturity investments had a fair value of $6,771.6 million against amortized cost of $7,562.1 million; gross unrealized losses were $808.1 million. About 95.8% of the portfolio was investment grade. Investment values and interest-rate movements may affect equity, liquidity and earnings.
- The $450 million senior-note principal due in February 2025 is a near-term refinancing or repayment consideration. Credit-agreement availability is subject to financial covenants.
- The company had $84.5 million of unfunded commitments to equity-method limited-liability investments and expects to fund commitments over the next several years, primarily from investment distributions.
- Kemper is involved in legal and regulatory proceedings in the ordinary course; management did not believe pending proceedings were reasonably likely to have a material financial-statement effect. The filing also highlights cyber, privacy, technology, competition and regulatory risks.
Important facts for investors to verify
- Whether rate increases and improved claim frequency continue to offset lower P&C new-business volumes and severity trends.
- Further development of P&C reserves, particularly specialty personal auto claims and prior catastrophe losses.
- Plans and funding for the 2025 senior-note maturity, and the availability of credit capacity under applicable covenants.
- Liquidity and capital needs at insurance subsidiaries, including restrictions on upstream dividends and collateral requirements on FHLB funding.
- Changes in fixed-income unrealized losses, investment income, and the valuation or liquidity of private investment commitments.