Kemper Corporation (NYSE: KMPR) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing; fourth-quarter figures are identified separately below. Unless noted otherwise, financial amounts are in millions of dollars.
Business context
Kemper is a U.S.-only insurance holding company operating through Specialty Property & Casualty, Preferred Property & Casualty, and Life & Health segments. Specialty auto is the largest business. The 2019 comparison with 2018 is significantly affected by the July 2018 acquisition of Infinity: 2019 includes a full year of its results, versus approximately six months in 2018.
Key financial results
| Metric | 2019 | 2018 |
|---|---|---|
| Earned premiums | $4,472.4 | $3,384.4 |
| Total revenues | $5,039.2 | $3,725.1 |
| Income from continuing operations | $531.1 | $188.4 |
| Net income | $531.1 | $190.1 |
| Diluted earnings per share | $7.96 | $3.22 |
| Adjusted Consolidated Net Operating Income (non-GAAP) | $418.3 | $258.4 |
| Net cash provided by operating activities | $534.3 | $539.2 |
Revenue growth was led by Specialty Property & Casualty, with earned premiums up $1,088.0 million overall. Net income improved by $341.0 million. Management attributed the increase to stronger adjusted operating income, better investment results, and lower acquisition-related costs. Net income included a $138.9 million pretax gain from changes in fair value of equity and convertible securities, compared with a $64.3 million loss in 2018; the filing’s non-GAAP adjusted operating measure excludes this item and other specified items.
Fourth quarter 2019: earned premiums were $1,145.8 million, total revenues $1,283.7 million, net income $124.7 million, and diluted EPS $1.85. The filing does not provide a clear comparable quarterly adjusted operating income figure in the supplied text.
Underwriting, investment, and balance sheet
- Specialty P&C: 2019 segment net operating income was $283.1 million versus $115.8 million. Earned premiums were $3,078.4 million. The combined ratio improved to 92.0% from 96.0%; the underlying combined ratio was 92.7% versus 95.7%. Results benefited from Infinity’s full-year inclusion and favorable prior-year reserve development.
- Preferred P&C: segment net operating income was $41.9 million versus $25.7 million. The combined ratio improved to 98.9% from 104.6%, helped by lower catastrophe losses and favorable reserve development. The underlying combined ratio worsened to 95.3% from 93.8%, reflecting higher underlying losses and expenses.
- Life & Health: segment net operating income was $98.7 million versus $91.5 million. Earned premiums rose to $643.7 million; net investment income declined to $206.4 million from $210.9 million.
- Reserves and catastrophes: P&C loss and LAE reserves were $1,969.8 million at year-end, up from $1,874.9 million. Prior-year reserve development was favorable by $71.1 million in 2019, compared with $7.4 million favorable in 2018. Catastrophe losses and LAE, excluding prior-year development, were $77.2 million versus $96.0 million.
- Investments: net investment income rose to $364.3 million from $340.9 million. Total investments were $9,044.4 million; 93% of fixed-maturity investments were investment-grade. Investment results included $41.9 million of realized gains and $13.8 million of impairment losses.
- Financial position: total assets were $12,989.1 million, shareholders’ equity $3,972.3 million, and book value per share $59.59, compared with $11,544.9 million, $3,050.1 million, and $47.10, respectively, in 2018. Consolidated cash was $136.8 million. Long-term debt at amortized cost was $778.4 million, down from $909.0 million.
- Liquidity and capital: Kemper directly held $206.8 million of cash and investments at year-end. Operating cash flow was $534.3 million; investing activities used $633.4 million and financing activities provided $160.8 million. Insurance subsidiaries paid $239.0 million in dividends to the parent in 2019; estimated 2020 dividends available without prior regulatory approval were approximately $435.4 million.
Material changes and unusual items
- The June 2019 common-stock offering raised $127.2 million net. Together with term-loan proceeds, it funded redemption of $150.0 million principal of 7.375% subordinated debentures; Kemper recorded a $5.8 million early-extinguishment loss.
- Kemper recognized $20.1 million in 2019 from partial payment of a judgment against CSC. The Fifth Circuit affirmed the judgment in January 2020; CSC sought rehearing. The unpaid amount remains a gain contingency and is not recognized.
- Favorable 2019 reserve development included the recognition and sale of subrogation rights related to certain 2017 and 2018 California wildfires. The company also reduced its estimate of the cost associated with death-verification database reviews by $21.0 million.
- The annual common dividend increased to $1.03 per share from $0.96. No shares were repurchased in 2019; $243.7 million remained under the repurchase authorization.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Kemper describes its strategy and operating environment but cautions that results may vary materially. Principal risks include catastrophe frequency and severity; uncertainty in P&C reserve estimates and claim inflation; significant personal-auto concentration in California and Florida; state rate and policy-form regulation; reinsurance availability and recoverability; investment-market and interest-rate movements; competition; cybersecurity and critical-system disruption; and continued integration of Infinity. As a holding company, Kemper depends on regulated subsidiary dividends to meet parent-company obligations. Management reported that insurance subsidiaries exceeded applicable minimum risk-based capital requirements at year-end. The auditor identified P&C reserves and fair-value estimates for certain fixed maturities as critical audit matters; the audit opinion on the financial statements and internal control was unqualified.
Important facts for investors to verify
- How much of earnings growth is repeatable operating performance versus favorable equity-market marks, prior-year reserve releases, and other nonrecurring items.
- Whether the favorable reserve development, including wildfire-related recoveries, persists; compare subsequent claims emergence with the $1,969.8 million P&C reserve balance.
- Underlying loss trends and pricing adequacy, particularly in specialty auto and homeowners, and exposure concentration in California and Florida.
- Investment portfolio valuation, credit quality, and sensitivity to market changes; the filing estimates a $489.1 million fair-value decline in fixed maturities under an instantaneous 100-basis-point rate increase.
- Debt repayment and refinancing needs, FHLB spread-lending collateral requirements, and the amount of subsidiary dividends actually available to the parent.
- Outcome and collectability of the remaining CSC judgment, and any further costs or benefits from Infinity integration.