Kemper Corporation — Q1 2020 Form 10-Q
Business context and reporting period
Kemper is an insurance holding company operating Specialty Property & Casualty, Preferred Property & Casualty, and Life & Health businesses. This unaudited filing covers the three months ended March 31, 2020, compared with the same period in 2019. Management cautions that interim results reflect estimates, seasonality, market conditions, and the effects of COVID-19.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Earned premiums | $1,166.4 million | $1,074.8 million |
| Total revenues | $1,229.0 million | $1,236.3 million |
| Net income | $64.0 million; $0.95 diluted EPS | $155.3 million; $2.35 diluted EPS |
| Adjusted consolidated net operating income, non-GAAP | $162.9 million | $98.9 million |
| Net cash from operating activities | $62.3 million | $89.0 million |
Earned premiums grew 8.5%, principally from Specialty P&C. Revenue was nearly flat as premium and investment-income growth was offset by a $117.8 million loss from changes in fair value of equity and convertible securities, versus a $64.4 million gain in Q1 2019. Net investment income rose to $85.6 million from $82.7 million. Impairment losses increased to $12.0 million from $3.6 million. Comprehensive loss was $97.2 million, including $161.2 million of other comprehensive loss, primarily investment-related.
Adjusted operating income included a $70.6 million after-tax benefit from the partial satisfaction of a legal judgment. Excluding that item, segment net operating income was $100.8 million, down from $105.5 million. Management attributed the reported net-income decline mainly to weaker investment results, higher impairments, and increased acquisition-related costs.
Insurance performance and material changes
- Specialty P&C: Segment net operating income fell to $60.1 million from $79.6 million. Earned premiums increased to $822.5 million from $729.3 million, but the combined ratio deteriorated to 94.5% from 89.3%; the underlying combined ratio was 93.9% versus 91.7%. Adverse prior-year reserve development was $5.5 million, compared with favorable development of $18.1 million a year earlier. Specialty personal auto was the main pressure.
- Preferred P&C: Segment net operating income increased to $18.4 million from $2.8 million. The combined ratio improved to 92.6% from 102.7%, mainly reflecting lower catastrophe losses and improved underlying losses, despite lower earned premiums.
- Life & Health: Segment net operating income decreased to $22.3 million from $23.1 million. Higher insurance expenses, including an accrual for distribution costs anticipated from COVID-19 disruption and investment in distribution capabilities, offset lower benefits and modest premium growth.
Balance sheet, debt, and liquidity
At March 31, 2020, total assets were $12.93 billion, total liabilities $9.17 billion, and shareholders’ equity $3.76 billion, compared with $12.99 billion, $9.02 billion, and $3.97 billion, respectively, at December 31, 2019. Cash was $301.3 million, up from $136.8 million; total investments were $8.94 billion, down from $9.26 billion. Parent-company cash and investments were $199.1 million.
Long-term debt was $778.1 million, broadly unchanged from year-end. The company reported no borrowings under its $400 million unsecured credit facility. Insurance subsidiary FHLB advances were $364.2 million, secured by pledged collateral with a fair value of $461.3 million. Operating cash flow declined year over year; investing activities provided $94.0 million, while financing activities provided $8.2 million. The company paid $20.0 million in dividends and repurchased $101.2 million of common stock during the quarter.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantified earnings or premium guidance. Management says COVID-19’s direct and indirect effects are highly uncertain and may materially affect operations, financial position, and liquidity.
- Kemper announced personal-auto premium credits equal to 15% of April and May 2020 premiums, expected to total approximately $100 million and subject to regulatory approval.
- COVID-19 risks identified include premium declines from economic contraction, investment downgrades and credit losses, changes in insurance claims and reserves, regulatory actions, business interruptions, and heightened cybersecurity exposure from remote work. The company recorded $4.2 million of net pre-tax COVID-19-related charges in Q1.
- The $89.4 million remaining balance of a judgment against CSC was received in February 2020 after the Fifth Circuit affirmed the award; it was recognized as other income. The matter had generated prior partial payments in 2018 and 2019.
- Management reported $0.9 million of adverse P&C reserve development in aggregate, including adverse specialty personal-auto development, partly offset by favorable commercial-auto and homeowners development. Reserve estimates may change as claims emerge.
- At quarter-end, 94% of fixed-maturity investments were investment grade. Gross unrealized losses on fixed maturities were $179.9 million, versus $20.8 million at year-end; the company attributed these declines to non-credit factors and said it did not intend, nor expect to be required, to sell the securities before recovery. Equity-market losses and credit deterioration remain material risks.
- On May 6, 2020, after quarter-end, the board authorized an additional $200 million of repurchases; remaining authorization was approximately $333 million. Future repurchases depend on market conditions, liquidity, and other factors.
- The company has ongoing uncertainty around life-insurance death-verification initiatives and related potential claims or regulatory requirements. It also had $89.5 million of unfunded commitments to equity-method investments and $144.2 million of commitments to certain limited-liability investments.
Important facts for investors to verify
- How much of adjusted operating income reflects recurring insurance performance versus the $70.6 million after-tax judgment benefit.
- Whether specialty personal-auto claims trends and adverse reserve development persist, and how subsequent periods develop prior-year reserves.
- The ultimate cost, regulatory approval, and customer impact of the approximately $100 million premium-credit program.
- Whether investment-market volatility translates into credit impairments, realized losses, or liquidity needs, given the sharp increase in unrealized losses.
- Cash generation and capital deployment after dividends, repurchases, FHLB advances, and investment commitments.
- Whether the filing’s risks related to COVID-19, life-insurance death verification, and regulatory or legal developments lead to material claims or expenses.