Kemper Corporation — Q3 2020 Form 10-Q
Business context and period. Kemper is an insurance holding company operating in Specialty Property & Casualty, Preferred Property & Casualty, and Life & Health. This unaudited report covers the three and nine months ended September 30, 2020; comparisons are with the same 2019 periods. Dollar amounts are in millions unless noted.
Financial results and key metrics
- Third quarter: Total revenue was $1,353.7, up 8.8%; earned premiums were $1,206.5, up 6.3%. Net income was $122.3, down 5.2%, and diluted earnings per share were $1.83 versus $1.91.
- Nine months: Total revenue was $3,813.6, up 1.5%; earned premiums were $3,458.2, up 4.0%. Net income was $312.4, down 23.1%, and diluted earnings per share were $4.67 versus $6.10. Adjusted consolidated net operating income, a non-GAAP measure, was $333.0 versus $320.4.
- Operating segments, Q3: Specialty P&C net operating income rose to $119.2 from $78.5; Preferred P&C reported a $32.7 loss versus $21.1 income; Life & Health income fell to $12.2 from $33.4. Specialty P&C’s combined ratio improved to 86.3% from 91.6%; Preferred P&C’s worsened to 129.9% from 92.4%, primarily reflecting catastrophe losses.
- Cash flow: Nine-month operating cash flow was $251.3, down from $366.5. Investing activities used $469.3; financing activities provided $433.4. Consolidated cash was $352.2 at quarter-end, compared with $136.8 at year-end 2019.
- Debt and liquidity: Long-term debt at amortized cost was $1,173.0, up from $778.4 at year-end. Kemper issued $400.0 of 2.400% senior notes due 2030, receiving net proceeds of $395.6 for general corporate purposes. The $400.0 revolving credit facility had no borrowings outstanding. Kemper directly held cash and investments of $738.7 at quarter-end.
- Capital and investments: Shareholders’ equity was $4,347.5, versus $3,972.3 at year-end. Kemper repurchased 1.6 million shares for $110.4 during the first nine months; it repurchased none in Q3. It paid $0.30 per share in Q3 dividends. Fixed maturities were 93% investment-grade; their fair value was $7,504.8.
Changes versus the prior comparable period
- Q3 net income declined despite higher revenue, mainly because lower Preferred P&C and Life & Health operating results and higher acquisition-related costs outweighed improved Specialty P&C results and stronger investment results.
- Q3 Preferred P&C catastrophe losses, excluding reserve development, increased to $61.9 from $11.9. Homeowners catastrophe losses were $58.6 versus $9.3.
- For the first nine months, Specialty P&C improved, but Preferred P&C moved to a loss and Life & Health income declined. Prior-year P&C reserve development was adverse by $28.3, compared with favorable development of $55.8 in 2019.
- Nine-month net investment income fell to $245.5 from $270.4, reflecting lower fixed-income yields, weaker alternative-investment returns and higher investment expenses. Q3 net investment income was nearly flat at $92.1 versus $91.7.
Outlook, commentary, risks and unusual items
- Management provided no specific earnings or revenue guidance in the supplied filing text. It cautioned that interim insurance results involve estimates and seasonality.
- COVID-19 affected results: Kemper issued approximately $100 million of premium credits in Q2, including $87.1 million in Specialty P&C and $12.7 million in Preferred P&C. Life & Health claims were also higher, primarily due to COVID-19-related mortality. The filing warns that the pandemic and related economic conditions may adversely affect premiums, claims, investments, credit losses, operations and liquidity.
- In February 2020, Kemper received $89.4 to satisfy the remaining balance of its CSC arbitration judgment and recognized it as other income. The judgment contributed $70.6 to nine-month adjusted consolidated net operating income. This was a material nonrecurring benefit to reported results.
- For Q4 2020, Kemper estimated an after-tax pension settlement charge of $45–$55, with a corresponding offset to accumulated other comprehensive income, following a partial settlement expected to be completed in Q4.
- Risks include catastrophe severity and frequency, reserve-estimate uncertainty, investment-market and credit performance, regulatory and litigation outcomes, COVID-19 impacts, and cybersecurity and remote-work risks. The filing also describes possible effects from LIBOR transition. Insurance subsidiaries’ dividends are subject to state restrictions; Kemper estimated approximately $137.0 of additional dividends could be paid to the parent without prior regulatory approval during the remainder of 2020.
- The company reported that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether improved Specialty P&C loss frequency persists and whether adverse prior-year reserve development continues.
- Preferred P&C catastrophe exposure and the effect of catastrophe losses on future underwriting results.
- The sustainability of Life & Health results amid COVID-19 mortality claims and the expected Q4 pension settlement charge.
- How much reported earnings depended on the CSC judgment and volatile investment gains, and how adjusted results reconcile to GAAP earnings.
- Debt, FHLB funding agreements and pledged collateral, liquidity needs, and the timing and scale of future share repurchases or dividends.
- The filing cites legal, regulatory, investment and pandemic risks; investors should review the full risk-factor and contingency disclosures for developments.