Kemper Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Kemper operates property and casualty and life and health insurance businesses through Specialty P&C, Preferred P&C, and Life & Health segments. Financial amounts below are in millions of dollars unless otherwise stated.
Key financial results
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Total revenue | $1,352.0 | $1,229.0 | Up $123.0 |
| Earned premiums | $1,200.8 | $1,166.4 | Up $34.4 |
| Net investment income | $103.1 | $85.6 | Up $17.5; alternative investment returns increased, partly offset by lower fixed-income yields |
| Income before taxes | $121.6 | $77.7 | Up $43.9 |
| Net income | $123.2 | $64.0 | Up $59.2; diluted EPS was $1.85 versus $0.95 |
| Adjusted consolidated net operating income (non-GAAP) | $87.2 | $162.9 | Down $75.7; prior-year results included a $70.6 after-tax gain from satisfaction of the CSC judgment |
| Operating cash flow | $140.6 | $62.3 | Up $78.3 |
| Investing cash flow | $311.7 | $94.0 | Included $677.4 of net proceeds from short-term investments |
| Financing cash flow | $(111.0) | $8.2 | Included $50.0 debt repayment, $42.1 cash used for repurchases, and $21.0 dividends |
Q1 2021 net income benefited substantially from a $52.2 pre-tax gain in fair value of equity and convertible securities, compared with a $117.8 loss in Q1 2020. Adjusted operating income excludes specified investment gains and losses, impairment losses, acquisition-related costs, and other defined items; it is a non-GAAP measure and is not a substitute for GAAP results.
Segments, underwriting, and margins
- Specialty P&C: Segment net operating income rose to $80.1 from $60.1. Earned premiums increased to $877.6 from $822.5. Combined ratio improved to 93.5% from 94.5%; underlying combined ratio was 93.5% versus 93.9%. Management cited improved underlying losses, favorable reserve development, and higher investment income. Commercial auto results weakened, including higher claim frequency and adverse prior-year reserve development.
- Preferred P&C: Segment net operating income declined to $9.6 from $18.4; earned premiums fell to $162.2 from $180.9. Combined ratio deteriorated to 105.4% from 92.6%, principally reflecting catastrophe losses of $24.0 versus $4.8. Underlying combined ratio improved to 90.7% from 92.3%.
- Life & Health: Segment net operating income declined to $7.3 from $22.3. Earned premiums were $161.0 versus $163.0. Higher life claims, including COVID-19-related mortality, and higher business investment expenses contributed to the decline; lower accident and health claim frequency partly offset the increase.
Financial position, liquidity, and capital
- At March 31, 2021, total assets were $14,203.7, total liabilities $9,864.6, and shareholders’ equity $4,339.1. Equity declined from $4,563.4 at year-end 2020, primarily reflecting a $290.0 after-tax other comprehensive loss, largely from lower unrealized gains on investment securities.
- Cash was $547.4, up from $206.1 at December 31, 2020. Total investments were $9,822.7, down from $10,424.1; short-term investments fell to $196.9 from $875.4.
- Long-term debt was $1,122.6, down from $1,172.8 after repayment of the $50.0 term loan. The $400.0 revolving credit facility had no borrowings outstanding. Debt fair value was $1,213.3.
- Kemper and its direct non-insurance subsidiaries held $607.1 in cash and investments, compared with $733.2 at year-end. Insurance subsidiaries paid $115.0 in dividends to the parent in Q1; management estimated approximately $296.1 of additional subsidiary dividends could be paid during the remainder of 2021 without prior regulatory approval.
- The fixed-maturity portfolio was 94% investment-grade at quarter-end. The company reported $124.1 of unfunded commitments to certain investment funds and partnerships, including $94.6 for equity-method limited liability investments and $31.5 for alternative-energy partnerships.
Material changes, outlook, and risks
- GAAP net income improved year over year, but adjusted operating income fell, reflecting the absence of the prior-year CSC judgment gain and lower Preferred P&C and Life & Health operating results.
- Alternative-energy partnership investments generated a $15.4 loss in Q1 2021; the company also recognized $28.4 of related investment tax credits. Changes in equity-security values boosted reported earnings but contributed to market-driven volatility.
- On April 1, 2021, after quarter-end, Kemper completed its acquisition of American Access Casualty Company and related entities for approximately $370.0 in cash. The acquired business wrote over $350.0 of direct premiums in 2020. This transaction is a subsequent event, not included in Q1 results.
- The filing provides no specific earnings or revenue guidance. Management cautioned that quarterly results should not be annualized, given insurance seasonality, estimates, market conditions, and COVID-19 impacts.
- Risks include COVID-19-related life mortality and changing claims patterns; catastrophe frequency and severity; claim-cost inflation and social inflation; uncertainty in loss reserves; investment-market volatility and credit risk; regulatory and legal developments, including life-policy death-verification initiatives; and execution and integration risks related to acquisitions and business initiatives. Management said it could not predict whether reserves would develop favorably or adversely; adverse development could materially affect results in a period.
- Legal proceedings are described as ordinary-course matters, with no material effect considered reasonably possible based on currently available information, except for the life-insurance death-verification initiatives whose outcomes remain uncertain. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Investor verification checklist
- Reconcile GAAP earnings with adjusted operating income, especially the effects of equity-market marks, investment impairments, and acquisition-related costs.
- Track catastrophe losses and combined ratios in Preferred P&C, and commercial auto claim frequency and reserve development in Specialty P&C.
- Monitor COVID-19-related mortality, life claim experience, and the Life & Health segment’s expense and earnings recovery.
- Review investment portfolio valuations, alternative-investment returns, unfunded commitments, and the effect of market movements on earnings and equity.
- Assess the AAC acquisition’s integration, purchase economics, and contribution to premiums and profitability after closing.
- Confirm ongoing holding-company liquidity, subsidiary dividend capacity, debt maturities, and capital allocation, including repurchases and dividends.