Kemper Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in millions of dollars unless noted. Prior-year comparisons reflect the company’s adoption of long-duration insurance accounting guidance (LDTI); comparative figures were recast.
Business context and financial results
Kemper operates specialty and preferred property and casualty (P&C) insurance businesses and a life and health insurance business. The Reserve National health insurer was sold in December 2022, affecting year-over-year comparisons.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenues | $1,262.8 | $1,417.7 | $2,557.6 | $2,787.8 |
| Earned premiums | $1,166.9 | $1,337.6 | $2,347.8 | $2,657.6 |
| Net investment income | $106.3 | $118.5 | $208.1 | $218.5 |
| Loss before income taxes | $(115.9) | $(94.6) | $(219.8) | $(210.3) |
| Net loss | $(97.1) | $(72.2) | $(177.2) | $(158.5) |
| Net loss per diluted share | $(1.52) | $(1.13) | $(2.77) | $(2.49) |
The company reported adjusted consolidated net operating losses, a non-GAAP measure, of $16.9 million for Q2 and $82.1 million for the first half, versus $37.2 million and $88.8 million, respectively, in 2022. These figures exclude specified investment, transaction, restructuring and impairment items.
Segments, margins and material changes
- Specialty P&C: First-half segment net operating loss was $69.2 million, improving from $83.6 million. Its combined ratio was 109.3% for the first half and 106.5% for Q2; underlying combined ratios were 105.0% and 102.0%, respectively. Premiums declined, principally as targeted underwriting actions reduced new business. Personal auto underwriting improved with rate increases and lower claim frequency, while commercial auto loss experience deteriorated.
- Preferred P&C: First-half segment net operating loss was $12.2 million, compared with $22.9 million. Combined ratios were 114.7% for the first half and 112.9% for Q2; underlying combined ratios were 96.2% and 95.6%. Underlying results improved, but catastrophe losses and prior-year reserve development remained material.
- Life & Health: Segment net operating income was $22.1 million for the first half and $8.9 million for Q2, down from $31.8 million and $20.2 million. Lower premium and investment income, including the Reserve National sale’s effect on comparisons, contributed to the decline.
First-half P&C reserves recorded $67.9 million of adverse prior-year loss and loss-adjustment-expense development, compared with $15.6 million of favorable development in the prior-year period. Goodwill impairment of $49.6 million pretax ($45.5 million after tax) was recorded in Q2 for Preferred P&C amid evaluation of strategic alternatives for the Preferred Insurance business.
Cash flow, balance sheet and liquidity
- Cash was $73.6 million at June 30, 2023, down from $212.4 million at year-end 2022. First-half operating cash flow was negative $65.9 million, investing cash flow negative $35.1 million, and financing cash flow negative $37.8 million. Operating cash use improved from $90.0 million in 2022, partly due to a federal tax refund.
- Total assets were $13.10 billion and shareholders’ equity was $2.51 billion at June 30, versus $13.31 billion and $2.67 billion at December 31, 2022.
- Long-term debt was $1.388 billion, broadly unchanged from year-end. No credit-agreement borrowings were outstanding; $460 million was available at June 30, subject to covenants. Parent and direct non-insurance subsidiaries held $220.3 million in cash and investments.
- Insurance subsidiaries had $601 million in FHLB funding-agreement obligations, backed by $756.5 million of pledged collateral. Kemper paid $39.6 million in shareholder dividends during the first half, or $0.62 per share.
- Fixed maturities had a fair value of $6.94 billion against $7.76 billion amortized cost, with $857.2 million of gross unrealized losses. The company reported 95.9% of the portfolio as investment grade.
Outlook, risks and unusual items
- Kemper expects to complete termination of its defined-benefit pension plan in Q3 2023. It estimates an after-tax settlement charge of $50 million to $70 million, primarily for previously unamortized benefit costs, with a corresponding offset to accumulated other comprehensive income.
- Management cited rate increases and underwriting actions as supporting P&C performance, while premium volume declined in several lines. Commercial auto claims were pressured by bodily injury frequency, inflation and supply constraints; catastrophe activity and adverse reserve development also affected results.
- Key risks include uncertainty in loss-reserve estimates, catastrophe severity and frequency, claims inflation and social inflation, investment-market and interest-rate movements, reinsurance availability and pricing, regulatory matters, and cybersecurity. Management said it did not believe pending legal proceedings were reasonably likely to have a material financial-statement effect.
- The company adopted LDTI effective January 1, 2023 using a modified retrospective method. The adoption materially changed certain reported insurance balances and other comprehensive income; the filing provides recast comparisons.
Important facts for investors to verify
- Whether personal-auto rate actions and underwriting changes can offset lower policy volume, catastrophe losses and adverse reserve development.
- Whether commercial-auto claim frequency and severity stabilize, and how subsequent reserve emergence compares with recorded estimates.
- Progress and potential outcomes of strategic alternatives for Preferred Insurance, and any further goodwill or valuation effects.
- The timing and final cost of the pension-plan termination relative to the estimated $50 million–$70 million after-tax charge.
- Liquidity and capital resources available to the parent, including credit-facility covenant capacity, subsidiary dividend restrictions and collateral requirements on FHLB funding.
- Changes in unrealized investment losses, investment income and the company’s ability to fund claims without realizing losses.