Kemper Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Kemper operates Specialty Property & Casualty, Preferred Property & Casualty, and Life & Health insurance businesses. Figures below are in millions of dollars unless noted.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $1,388.7 | $1,352.0 |
| Earned premiums | $1,338.6 | $1,200.8 |
| Net investment income | $100.0 | $103.1 |
| Net income (loss) | $(94.8) | $123.2 |
| Diluted earnings (loss) per share | $(1.49) | $1.85 |
| Adjusted consolidated net operating income (loss), non-GAAP | $(60.1) | $87.2 |
| Operating cash flow | $(18.2) | $140.6 |
- Premium growth was driven mainly by Specialty P&C, including the acquired American Access Casualty business and higher average premium per exposure. Total revenue also reflected lower investment fair-value gains.
- Underwriting performance weakened substantially. Specialty P&C reported a $44.7 net operating loss versus $80.1 income; its combined ratio rose to 108.6% from 93.5%, and its underlying combined ratio was 108.7% versus 93.5%. Preferred P&C reported a $6.1 loss versus $9.6 income; its combined ratio increased to 111.6% from 105.4%.
- Life & Health net operating income was $3.1, down from $7.3. Lower initiative spending helped expenses, but higher life mortality-related benefits weighed on results.
- Total comprehensive loss was $605.2, including $510.4 of after-tax other comprehensive loss, principally reflecting declines in unrealized investment values.
Balance sheet, debt and liquidity
- At March 31, 2022, total assets were $14,614.7, total liabilities $11,220.2, and shareholders’ equity $3,394.5; year-end equity was $4,007.7. Investments totaled $9,968.1 and cash was $297.3.
- Long-term debt at amortized cost rose to $1,385.2 from $1,121.9. Kemper issued $400 million of 3.800% senior notes due 2032 and $150 million of 5.875% junior subordinated debentures due 2062, and redeemed $275 million principal amount of 5.000% notes due 2022. The redemption generated a $3.7 early-extinguishment loss.
- The amended revolving credit facility provides $600 million of capacity, expandable by $200 million; there were no borrowings under it at quarter-end. Parent and direct non-insurance subsidiaries held $318.3 of cash and investments.
- Operating cash flow turned negative, primarily due to higher P&C claim payments. Financing cash flow was $392.4, mainly reflecting debt issuance and increased FHLB advances. FHLB funding-agreement obligations were $553.1, secured by collateral with a fair value of $622.5.
- Kemper paid a $0.31-per-share quarterly dividend. Insurance subsidiaries were estimated to have capacity to pay approximately $128.6 in additional dividends to the parent during the rest of 2022 without prior regulatory approval.
Changes, outlook and risks
- Management estimated COVID-19 and related economic conditions reduced Q1 2022 net results by $120, versus an estimated $5 impact in Q1 2021. The 2022 effect was attributed mainly to higher P&C loss costs from inflation, supply-chain constraints and labor costs, and excess pandemic-related Life & Health mortality.
- P&C underlying loss ratios deteriorated as driving activity returned toward pre-pandemic levels and claim severity rose. Management cited inflation, supply-chain disruption, higher repair costs, and labor constraints. Specialty personal auto’s underlying loss ratio increased to 91.8% from 74.7%; Preferred personal auto’s rose to 83.8% from 65.8%.
- Investment results were materially weaker: fair-value changes in equity and convertible securities were a $28.2 loss versus a $52.2 gain; realized investment gains were $1.5 versus $13.8. Fixed-maturity unrealized losses in OCI also reduced equity. Management said the unrealized fixed-maturity losses were non-credit-related and it did not intend, nor expect to be required, to sell the securities before recovery.
- The filing provides no specific earnings or premium guidance. Management cautions that quarterly results should not be annualized, given insurance seasonality, estimates, market conditions and COVID-19 effects.
- Key risks include claims inflation and social inflation, catastrophe frequency and severity, reserve-estimation uncertainty, investment-market and interest-rate changes, insurance-rate regulatory approvals, reinsurance availability, competition, cyber and technology risks, and legal or regulatory developments. The company reported ordinary-course legal proceedings and stated it did not believe pending matters were reasonably likely to materially affect the interim statements. It also described uncertainty around initiatives requiring life insurers to identify deceased policyholders and settle claims.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether P&C claim frequency and severity—and the resulting combined ratios—improve as rate increases earn through and inflation or supply constraints change.
- Whether the estimated $120 million COVID-19 and related economic impact is an appropriate measure, and how mortality and auto loss trends develop.
- How investment-market movements affect realized results, OCI, shareholders’ equity and the ability to hold fixed maturities to recovery.
- The development of insurance reserves, particularly commercial auto and other lines with adverse prior-year development, and the sensitivity of results to reserve revisions.
- The cost and terms of new debt and FHLB funding, liquidity under adverse claims or catastrophe conditions, and the availability of insurance-subsidiary dividends.
- The assumptions and exclusions underlying adjusted operating income and underlying combined ratios, which are non-GAAP measures and should be considered alongside GAAP results.