Kemper Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The unaudited filing covers Kemper’s property and casualty and life and health insurance operations.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Earned premiums | $1,353.7 million | $1,337.7 million | $2,692.3 million | $2,538.5 million |
| Total revenues | $1,433.8 million | $1,507.7 million | $2,822.5 million | $2,859.7 million |
| Net income (loss) | $(74.7) million | $(62.6) million | $(169.5) million | $60.6 million |
| Adjusted consolidated net operating income (loss), non-GAAP | $(39.7) million | $(99.4) million | $(99.8) million | $(12.2) million |
| Operating cash flow | Not separately stated | Not separately stated | $(90.0) million | $237.7 million |
Q2 premiums increased 1.2%, while total revenue declined 4.9%, chiefly reflecting investment valuation results. Q2 net loss widened by $12.1 million year over year, despite an improvement in adjusted operating loss. For the first half, the company swung from net income to a net loss; adjusted operating loss also worsened substantially. Basic and diluted loss per share were $1.17 for Q2 and $2.66 for the first half.
Net investment income was $118.5 million in Q2 and $218.5 million for the first half, modestly higher than the comparable periods. Conversely, first-half change in fair value of equity and convertible securities was a loss of $68.7 million, versus a gain of $93.0 million in 2021. First-half net realized investment gains fell to $12.5 million from $33.0 million, while impairment losses rose to $13.8 million from $7.2 million.
Underwriting and segment results: Specialty P&C reported a first-half net operating loss of $83.6 million, versus a loss of $11.6 million; its underlying combined ratio deteriorated to 108.8% from 100.9%. Preferred P&C recorded a $22.9 million loss, versus $1.3 million of income; its underlying combined ratio rose to 105.1% from 96.9%. Life & Health net operating income was $20.8 million, approximately flat with the prior-year period. A combined ratio above 100% indicates underwriting losses before investment income.
Balance sheet, cash flow, and capital
- At June 30, total assets were $13.953 billion, total liabilities $11.103 billion, and shareholders’ equity $2.850 billion, compared with $14.917 billion, $10.909 billion, and $4.008 billion, respectively, at year-end 2021. Equity fell principally amid large investment-related other comprehensive losses and the first-half net loss.
- Cash was $348.6 million, up from $148.2 million at year-end. First-half operating cash use was $90.0 million; investing cash use was $132.5 million; financing provided $422.9 million. Management attributed lower operating cash flow largely to higher paid P&C claims.
- Long-term debt at amortized cost was $1.386 billion, up from $1.122 billion at year-end. 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 of 5.000% notes due 2022. The company reported no borrowings under its $600 million revolving credit facility, which has a $200 million accordion feature.
- Insurance subsidiary FHLB funding agreements were $602.8 million, up from $401.9 million, secured by $728.1 million of pledged collateral. These advances supported spread lending and are distinct from parent-company long-term debt.
- Kemper paid $0.31 per share in Q2 dividends. No common shares were repurchased in the first half; $171.6 million remained under the repurchase authorization. Direct non-insurance subsidiaries held $275.9 million in cash and investments. Insurance subsidiaries were estimated to have capacity for approximately $105.2 million in additional dividends to the parent without prior regulatory approval during the remainder of 2022.
Fixed-maturity investments had a fair value of $7.219 billion at June 30, compared with $7.987 billion at December 31, 2021. The portfolio carried $675.8 million of gross unrealized losses, versus $32.7 million at year-end. Management attributed the losses principally to non-credit factors and stated it did not intend, nor expect to be required, to sell the affected securities before recovery. First-half comprehensive investment losses were $1.302 billion; after-tax other comprehensive loss was $968.9 million.
Changes, outlook, and risks
- Management estimated COVID-19 and related economic conditions reduced net results by $240 million in the first half of 2022, including an estimated $120 million in Q2. It cited P&C loss-cost pressure from inflation, supply constraints, used-car demand and labor costs, as well as excess pandemic-related mortality in Life & Health. These are management estimates, not separately audited measures.
- Management attributed worsening P&C underlying claims trends to the return of driving activity and higher claim severity from inflation and supply-chain constraints. Specialty personal auto’s first-half underlying loss ratio rose 9.5 percentage points to 91.7%; Preferred P&C’s first-half underlying loss ratio rose to 72.9% from 65.2%. Profit-improvement actions reduced private passenger auto policy counts and volumes in some businesses.
- First-half P&C prior-year reserve development was favorable by $15.6 million, compared with adverse development of $82.8 million in 2021. Specialty personal auto had $25.0 million of favorable development, while commercial auto and some other lines had adverse development. Management cautioned that reserve estimates may develop differently and could materially affect results for a period.
- No quantified earnings or operating guidance is provided in the supplied filing text. Management cautions that results are exposed to claims frequency and severity, catastrophe losses, reserve estimates, inflation, investment-market movements, interest rates, regulatory actions, reinsurance conditions, competition and cybersecurity risks.
- On July 29, 2022, Kemper agreed to sell Reserve National Insurance Company and subsidiaries, doing business as Kemper Health, to Medical Mutual of Ohio for $90 million. The transaction is subject to regulatory approval and other closing conditions, with closing expected in the second half of 2022 or early 2023.
- Kemper said pending legal proceedings were not reasonably expected, based on currently available information, to materially affect its financial statements. It noted uncertainty around initiatives concerning insurers’ use of death-verification databases and related policyholder obligations.
Important facts for investors to verify
- Whether rate actions and underwriting changes can offset persistent auto claim severity, inflation and supply-chain pressures without excessive policy attrition.
- Whether the large unrealized fixed-income losses remain primarily market-driven and how interest rates and any need to sell investments could affect capital and liquidity.
- How P&C reserve development evolves, particularly in auto lines, and whether current favorable development is sustainable.
- The amount, collateral terms and economics of FHLB spread-lending funding, and the availability of dividends from regulated insurance subsidiaries.
- Regulatory approval, closing timing and final proceeds from the announced $90 million Kemper Health sale.
Unless otherwise indicated, amounts are in U.S. dollars. Adjusted operating results and underlying combined ratios are non-GAAP measures and should be considered alongside their GAAP counterparts.