Kemper Corporation — Q1 2019 Form 10-Q Summary
Business context and reporting period
Kemper is an insurer operating in Preferred Property & Casualty, Specialty Property & Casualty, and Life & Health. This unaudited report covers the three months ended March 31, 2019, compared with the same period in 2018. Results reflect the July 2018 acquisition of Infinity Property and Casualty Corporation; comparisons are therefore materially affected by the acquired business.
Financial performance and condition
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Earned premiums | $1,074.8 million | $609.8 million |
| Total revenues | $1,236.3 million | $693.0 million |
| Income from continuing operations | $155.3 million | $53.6 million |
| Net income | $155.3 million | $53.8 million |
| Diluted earnings per unrestricted share | $2.35 | $1.02 |
| Adjusted consolidated net operating income (non-GAAP) | $98.9 million | $57.5 million |
| Net cash provided by operating activities | $89.0 million | $74.0 million |
- Revenue growth was primarily acquisition-driven: Infinity contributed $389.4 million of the $465.0 million increase in earned premiums. Specialty P&C earned premiums rose to $729.3 million from $278.4 million.
- Reported earnings included $64.4 million of pre-tax gains from changes in the fair value of equity and convertible securities, $16.1 million of net realized investment gains, and $3.6 million of investment impairment losses. Adjusted consolidated net operating income excludes these investment items and acquisition-related costs.
- Preferred P&C reported a 102.7% combined ratio, versus 98.3%; higher catastrophe losses and weaker homeowners results weighed on performance. Specialty P&C reported an 89.3% combined ratio, versus 93.2%, with favorable prior-year reserve development and improved underlying loss ratios. Combined ratios below 100% indicate underwriting profit.
- Total assets were $12.182 billion and shareholders’ equity was $3.320 billion at March 31, 2019. Total investments were $8.537 billion and cash was $107.0 million.
- Long-term debt was $908.5 million; collateralized investment borrowings were $187.7 million, up from $10.0 million at year-end. The new borrowings were secured by pledged municipal securities and used to buy fixed-maturity investments. No borrowings were outstanding under the $300 million revolving credit agreement.
- Operating cash flow was $89.0 million; investing activities used $219.7 million and financing activities provided $162.6 million. Kemper directly held $118.6 million in cash and investments at quarter-end. The company paid a quarterly dividend of $0.25 per common share.
Material changes versus the prior comparable period
- Net income increased by $101.5 million, reflecting the Infinity acquisition, investment gains, and improved Specialty P&C results. The $50.3 million after-tax year-over-year increase in equity and convertible-security fair-value gains was a significant contributor.
- Specialty P&C net operating income rose to $79.6 million from $23.4 million, driven largely by Infinity and favorable reserve development. Company-wide P&C reserves developed favorably by $21.4 million, compared with $1.3 million in Q1 2018.
- Preferred P&C net operating income fell to $2.8 million from $13.5 million, primarily due to higher catastrophe losses. Life & Health net operating income declined to $23.1 million from $24.1 million, mainly due to lower investment income.
- Net investment income increased modestly to $82.7 million from $79.2 million, but returns from alternative investments were lower. Other comprehensive income was $129.1 million, compared with a $95.7 million loss, primarily reflecting investment valuation movements.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific revenue or earnings guidance. Management cautions that interim insurance results are affected by seasonality, market conditions, estimates, and claims development.
- Management identified risks including catastrophe frequency and severity, inflation and claims trends, reserve-estimate uncertainty, investment-market changes, regulation and litigation, competition, cybersecurity, and the ability to integrate Infinity and realize anticipated synergies and savings.
- Kemper reported a favorable $21.4 million prior-year P&C reserve development in Q1, but stated that future development may be favorable or adverse and could materially affect results for a period.
- A Texas court entered a $141.7 million judgment in Kemper’s favor against DXC Technology in an arbitration dispute; DXC is appealing. Kemper had received $35.7 million in 2018. A further $20.1 million payment received after quarter-end is a gain contingency and was not recognized in Q1; the filing says it is expected to be recognized in Q2. Collection of the remaining judgment and timing are uncertain.
- Insurance subsidiaries paid $55 million in dividends to Kemper in Q1; management estimated approximately $296 million of additional 2019 dividends could be paid without prior regulatory approval. The filing also notes collateral requirements on FHLB borrowings and $244.0 million of unfunded investment commitments to limited liability companies and partnerships.
- Adoption of lease accounting in 2019 established a right-of-use asset of $78.0 million and lease liability of $82.5 million, with no opening-equity impact. Management was evaluating the effects of new expected-credit-loss and long-duration-insurance accounting standards.
Important facts for investors to verify
- How much of Specialty P&C growth and profitability is attributable to Infinity, and whether integration costs, synergies, and expected savings develop as planned.
- Whether the favorable reserve development persists and how catastrophe losses, especially in homeowners, affect underwriting results.
- How much reported earnings depend on market-sensitive investment gains, and how portfolio valuations and alternative-investment returns change.
- The terms, collateral headroom, and refinancing implications of FHLB investment borrowings, alongside debt maturities and insurance-subsidiary dividend capacity.
- The outcome of DXC’s appeal, collections under the judgment, and the timing and accounting treatment of subsequent payments.