Kemper Corporation (NYSE: KMPR) — 2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020, not a standalone fourth quarter. Kemper is a U.S.-focused insurance holding company operating in Specialty Property & Casualty, Preferred Property & Casualty, and Life & Health insurance. It reported more than $14.3 billion in assets and served over 6.2 million policies.
Financial and operating performance
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $5,205.7 million | $5,039.2 million |
| Earned premiums | $4,672.2 million | $4,472.4 million |
| Net investment income | $348.2 million | $364.3 million |
| Income from continuing operations / net income | $409.9 million | $531.1 million |
| Diluted earnings per share | $6.14 | $7.96 |
| Operating cash flow | $448.0 million | $534.3 million |
| Total assets | $14,341.9 million | $12,989.1 million |
| Shareholders’ equity | $4,563.4 million | $3,972.3 million |
| Long-term debt | $1,172.8 million | $778.4 million |
Earned premiums rose 4.5%, while net income declined 22.8%. Management’s non-GAAP Adjusted Consolidated Net Operating Income was $438.8 million, up from $418.3 million; this measure excludes specified investment, acquisition, debt and pension items and is not a substitute for GAAP earnings.
- Specialty P&C: Segment net operating income increased to $337.9 million from $283.1 million. Its combined ratio improved to 90.8% from 92.0%; the underlying combined ratio improved to 89.9% from 92.7%.
- Preferred P&C: Segment net operating income fell to $3.5 million from $41.9 million. The combined ratio worsened to 105.2% from 98.9%, despite an improved underlying combined ratio of 90.4% versus 95.3%.
- Life & Health: Segment net operating income declined to $60.0 million from $98.7 million, primarily reflecting higher life mortality claims associated mainly with COVID-19.
Cash and investments held directly by the parent totaled $733.2 million at year-end, compared with $206.8 million a year earlier. The company had $206.1 million of consolidated cash and $875.4 million of short-term investments. Its $400 million unsecured revolving credit facility had no outstanding borrowings. Insurance subsidiaries’ statutory capital exceeded applicable minimum risk-based capital requirements.
Material changes and unusual items
- Kemper recognized approximately $99.8 million of COVID-19 premium credits, reducing earned premiums, primarily in the second quarter.
- Reported earnings included a $89.4 million gain from final collection of a judgment against CSC. This was a significant, non-recurring contribution to results.
- A $64.1 million pre-tax pension settlement charge followed annuity purchases and lump-sum payments for certain plan participants; the charge was noncash in the income statement.
- Acquisition-related transaction, integration and other costs were $63.3 million, compared with $18.4 million in 2019.
- Investment gains from changes in fair value of equity and convertible securities were $72.1 million, down from $138.9 million; net investment income also declined, mainly due to lower fixed-income yields and higher investment expenses.
- Property and casualty reserves recorded $36.4 million of adverse prior-year development in 2020, versus $71.1 million of favorable development in 2019. Catastrophe losses and LAE, excluding prior-year reserve development, were $106.7 million versus $77.2 million.
- Kemper issued $400 million of 2.40% senior notes due 2030, with net proceeds of $395.6 million for general corporate purposes. It repurchased 1.6 million shares for $110.4 million and paid $1.20 per share in dividends.
Outlook, risks and contingencies
The filing provides no numerical earnings or revenue guidance. Management said COVID-19 effects remained uncertain. The company announced a planned $370 million cash acquisition of American Access Casualty Company and related entities, expected to close in the first quarter of 2021 subject to regulatory approval and customary conditions.
- Concentration is significant: California and Florida represented 70% of 2020 personal-auto gross written premiums; California alone represented 63% of Specialty P&C segment premiums.
- Key exposures include catastrophe frequency and severity, reserve-estimation uncertainty, social and claims-cost inflation, reinsurance availability and counterparty performance, and regulatory constraints on rates and policy changes.
- COVID-19 affected mortality claims, premium volumes and investment markets; reduced accident and health claim frequency partly offset higher life claims.
- The investment portfolio remains exposed to interest-rate, credit, equity-market and liquidity risks. About 94% of fixed-maturity investments were investment grade at year-end.
- The company is subject to legal, regulatory, privacy and cybersecurity risks, including matters involving life-insurance death verification and unclaimed property. Management stated it could not reliably predict outcomes for these matters.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Property and casualty reserves and fair values of certain fixed maturities were identified as critical audit matters.
Most important facts for investors to verify
- Whether improved Specialty P&C underlying loss performance persists and whether adverse reserve development continues, particularly in auto liability.
- Whether Preferred P&C catastrophe losses and its above-100% combined ratio improve, and how its California wildfire-related reserve recoveries compare with prior periods.
- The sustainability of Life & Health earnings after COVID-related mortality impacts and the effects of any continuing pandemic-related claims.
- How much 2020 GAAP earnings depended on the CSC judgment recovery and investment marks, and the ongoing impact of pension and acquisition expenses.
- The returns, credit quality and liquidity of the investment portfolio, along with the company’s increased debt and FHLB funding obligations.
- Completion, purchase accounting and expected benefits of the proposed American Access acquisition, as well as the availability of regulated subsidiary dividends to fund parent-company needs.