Kemper Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Amounts are in millions except per-share data. Kemper operates Specialty Property & Casualty, Preferred Property & Casualty, and Life & Health insurance businesses.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Earned premiums | $1,337.7 | $1,085.3 | $2,538.5 | $2,251.7 |
| Total revenues | $1,507.7 | $1,230.9 | $2,859.7 | $2,459.9 |
| Net income (loss) | $(62.6) | $126.1 | $60.6 | $190.1 |
| Diluted earnings (loss) per share | $(0.97) | $1.91 | $0.92 | $2.85 |
| Adjusted consolidated net operating income (loss), non-GAAP | $(99.4) | $79.2 | $(12.2) | $242.1 |
Revenue growth was led by Specialty P&C premium growth, including the AAC acquisition, and higher net investment income. The increase in first-half net investment income to $217.0 from $153.4 reflected stronger alternative-investment returns and higher investment balances, partly offset by lower fixed-income yields. Reported earnings also included investment fair-value movements: a $93.0 gain in the first half of 2021 versus a $46.2 loss in 2020.
Underwriting and segment results
- Specialty P&C: First-half segment net operating loss was $11.6, versus income of $127.6 a year earlier; Q2 loss was $91.7 versus income of $67.5. Combined ratio was 105.6% for the first half and 116.1% for Q2, compared with 92.9% and 91.0%. Underlying combined ratios were 100.9% and 107.3%, respectively. Management cited higher claim frequency and severity and adverse prior-year reserve development, particularly from Florida personal-injury-protection legal developments and liability claims.
- Preferred P&C: First-half segment net operating income fell to $1.3 from $19.3; Q2 recorded a loss of $8.3 versus income of $0.9. Combined ratios were 112.2% for the first half and 118.9% for Q2. Higher catastrophe losses and worsening underlying losses pressured results.
- Life & Health: First-half segment net operating income declined to $20.3 from $38.4; Q2 income was $13.0 versus $16.1. Higher life mortality related to COVID-19, accident and health claims, and business-modernization expenses were cited.
Property and casualty reserves recorded $82.8 of adverse prior-year development in the first half, versus $19.5 in 2020. Specialty P&C accounted for most of the adverse development. Preferred P&C catastrophe losses were $48.2, compared with $25.4 in the first half of 2020.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $237.7, compared with $263.8 in 2020. Investing activities used $77.9; financing activities used $260.8. Cash declined to $105.1 from $206.1 at year-end.
- At June 30, total assets were $14,950.7, total liabilities $10,644.5, and shareholders’ equity $4,306.2, down from $4,563.4 at December 31, 2020. Investment assets totaled $10,442.3.
- Long-term debt was reported at $1,122.3 on the balance sheet, versus $1,172.8 at year-end. Kemper repaid the $50.0 term loan in March. The $400.0 unsecured revolving credit facility had no outstanding borrowings; its maturity is June 2023.
- Insurance subsidiary FHLB funding agreements totaled $382.8 and were secured by collateral with a fair value of $468.0. Parent and direct non-insurance subsidiaries held cash and investments of $214.8, compared with $733.2 at year-end. Management said P&C subsidiaries maintained adequate liquidity for multiple catastrophe events.
- Kemper repurchased approximately 2.045 million shares for a reported aggregate cost of $158.7 and paid $41.2 in dividends in the first half. The quarterly dividend was $0.31 per share. Remaining repurchase authorization was $174.6 at June 30.
Material changes, outlook and risks
Kemper completed its acquisition of American Access Casualty Corporation on April 1, 2021, for approximately $371.0 cash consideration. AAC provides specialty private-passenger auto insurance and wrote more than $350 of direct premiums in 2020. Purchase-price allocation remained preliminary; the filing noted expected scale, underwriting and claims synergies but did not quantify future savings.
The filing provides no earnings or revenue guidance. Management cautioned that interim results should not be annualized, citing insurance seasonality, market conditions and COVID-19 impacts. Key exposures include claim inflation and severity, reserve-estimation uncertainty, catastrophe frequency, investment-market volatility, regulatory and legal developments, cyber and technology risks, and COVID-19 effects. Legal proceedings are described as ordinary-course matters; the filing discusses continuing uncertainty around life-insurance death-verification initiatives and related regulatory or litigation outcomes.
Alternative-energy partnership investments generated a $23.1 first-half loss in the income statement, while related investment tax credits supported tax benefits. Management also noted that alternative-investment income may fluctuate materially between periods. No material changes to market-risk disclosures were reported.
Important facts for investors to verify
- Whether deteriorating auto claim frequency, severity and adverse reserve development persist, and how rate actions affect retention and premium growth.
- Further catastrophe losses and the adequacy and variability of P&C reserves, particularly specialty auto liability and Florida PIP claims.
- Whether AAC integration delivers the expected strategic and cost benefits, and how final purchase accounting affects goodwill and amortization.
- The sustainability of alternative-investment returns, equity fair-value gains and investment tax credits, given their effect on reported versus adjusted earnings.
- Near-term liquidity and capital flexibility, including reduced parent-level cash and investments, the 2022 senior-note maturity, FHLB collateral requirements, dividends and buybacks.
- The filing presents slightly different long-term debt amounts in the balance sheet and MD&A ($1,122.3 and $1,122.6) and different first-half repurchase figures in cash flows and equity disclosures ($151.7 cash used and $158.7 aggregate cost); investors may wish to reconcile these presentations.