Kemper Corporation (NYSE: KMPR) — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited consolidated results. Kemper operates Specialty Property & Casualty, Preferred Property & Casualty, and Life & Health insurance businesses.
Financial results and key metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Earned premiums | $1,307.0 million | $1,356.1 million | $3,999.3 million | $3,894.6 million |
| Total revenues | $1,377.6 million | $1,455.4 million | $4,200.1 million | $4,315.1 million |
| Net income (loss) | $(76.2) million | $(75.3) million | $(245.7) million | $(14.7) million |
| Loss per unrestricted share, diluted | $(1.19) | $(1.18) | $(3.85) | $(0.23) |
| Adjusted consolidated net operating income (loss), non-GAAP | $(30.5) million | $(75.8) million | $(130.3) million | $(88.0) million |
| Operating cash flow | Nine months: $(170.1) million | Prior-year period: $307.6 million |
Q3 total expenses were $1,467.2 million, versus $1,585.2 million a year earlier. Nine-month expenses were $4,513.9 million, versus $4,413.0 million. The nine-month income tax benefit was $68.1 million; Q3 tax benefit was $13.4 million.
Underwriting: Specialty P&C reported a Q3 combined ratio of 107.6% and underlying combined ratio of 106.8%, compared with 111.6% and 108.9%, respectively, in Q3 2021. For the first nine months, the combined ratio was 108.1% and underlying ratio 108.1%, compared with 107.6% and 103.5%. Preferred P&C’s Q3 combined ratio was 110.1% and underlying ratio 103.6%, compared with 116.6% and 102.2%; nine-month ratios were 114.4% and 104.6%, compared with 113.6% and 98.7%. Ratios above 100% indicate underwriting losses.
Segments: Q3 net operating losses were $28.7 million in Specialty P&C and $2.1 million in Preferred P&C; Life & Health generated $12.6 million of net operating income. For nine months, the respective results were losses of $112.3 million and $25.0 million, and income of $33.4 million.
Balance sheet and debt: At September 30, total assets were $13.46 billion, total liabilities $11.02 billion, and shareholders’ equity $2.44 billion, compared with $14.92 billion, $10.91 billion, and $4.01 billion at December 31, 2021. Cash was $249.2 million, versus $148.2 million. Long-term debt was $1.386 billion, versus $1.122 billion. The $600 million unsecured revolving credit facility, extendable to $800 million, had no borrowings outstanding.
Investment and comprehensive income: Nine-month net investment income was $316.3 million, down from $318.9 million; Q3 was $97.8 million, down from $101.9 million. Nine-month loss from changes in fair value of equity and convertible securities was $79.9 million, compared with income of $92.4 million in 2021. Nine-month other comprehensive loss, net of tax, was $1.295 billion, largely reflecting unrealized investment losses. Fixed-maturity fair value was $6.679 billion versus $7.987 billion at year-end; the filing reports $1.031 billion of gross unrealized fixed-maturity losses at quarter-end.
Material changes versus comparable periods
- Nine-month net loss widened by $231.0 million, reflecting weaker adjusted operating results and investment valuation results. Q3 net loss was nearly unchanged year over year, while adjusted operating loss improved by $45.3 million.
- Nine-month earned premiums rose $104.7 million, driven primarily by Specialty P&C; Q3 premiums fell $49.1 million year over year. Kemper cited ongoing underwriting actions that reduced policies and premium volume, alongside rate increases.
- Specialty P&C’s nine-month net operating loss increased by $41.4 million, primarily from higher underlying losses and LAE associated with severity. Preferred P&C’s loss increased by $19.9 million, chiefly from higher underlying losses.
- Property-and-casualty reserves had $22.5 million of favorable prior-year development in the first nine months of 2022, versus $107.9 million of adverse development in the prior-year period.
- Operating cash flow swung to a $170.1 million use of cash, which management attributed mainly to higher paid P&C losses and rising severity. Financing cash flow was $403.8 million provided, including proceeds from new debt and increased FHLB spread-lending advances.
- Equity declined by $1.57 billion from year-end, with the substantial accumulated other comprehensive loss reflecting investment-value declines. The filing states unrealized fixed-maturity losses were considered non-credit-related at the evaluation date and Kemper did not intend, nor expect to be required, to sell the securities before recovery.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or premium guidance. Management cautions that interim results are affected by seasonality, estimates, market conditions and COVID-19 impacts; nine-month results should not be annualized as a forecast.
- Management identified inflation and supply-chain constraints as increasing claims severity. Specialty P&C also cited lower frequency in Q3 following targeted underwriting actions; catastrophe losses included Hurricane Ian. The filing highlights catastrophe exposure, reserve estimation uncertainty, social inflation, reinsurance availability, investment-market volatility, interest rates, competition and regulatory risks.
- In July 2022, Kemper agreed to sell Reserve National Insurance Company for $90 million. It recorded a $2.0 million expected sale loss and a $4.5 million goodwill impairment. The transaction was expected to close late in Q4 2022, subject to regulatory approval; its results remained in continuing operations.
- During 2022, Kemper issued $400 million of 3.8% senior notes due 2032 and $150 million of 5.875% fixed-rate-reset junior subordinated debentures due 2062, and redeemed $275 million principal of 5.0% notes due 2022. The early debt extinguishment generated a $3.7 million loss.
- Adoption of the long-duration insurance accounting standard was scheduled for January 1, 2023. Kemper estimated an after-tax decrease to shareholders’ equity of approximately $1.0–$1.1 billion at transition using the then-applicable transition assumptions; it said September 2022 discount rates, all else equal, would instead imply a $175–$275 million increase from reserve changes. The filing notes that the AOCI impact also reflects invested-asset fair values.
- Legal proceedings are described as ordinary-course matters; management did not believe any pending matter was reasonably likely to have a material effect on the interim financial statements.
Important facts for investors to verify
- Whether rate increases and underwriting actions can offset persistent claims severity and restore profitable P&C combined ratios.
- Subsequent development of loss reserves, including the sustainability of favorable prior-year development and the effect of inflation, litigation and catastrophe claims.
- Investment portfolio sensitivity to interest rates and credit conditions, the scale and duration of unrealized losses, and any liquidity or capital consequences.
- Operating cash generation, claims payments, and the use and collateral requirements of FHLB funding; parent-company liquidity and regulatory limits on subsidiary dividends.
- Completion and final financial effects of the RNIC sale, and the actual equity impact and implementation costs of the 2023 long-duration accounting transition.