Kemper Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; compared with the corresponding 2018 periods. Amounts are in U.S. dollars. Kemper operates Preferred Property & Casualty, Specialty Property & Casualty, and Life & Health insurance segments.
Financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $1,275.4 million | $741.9 million | $2,511.7 million | $1,434.9 million |
| Earned premiums | $1,116.6 million | $658.1 million | $2,191.4 million | $1,267.9 million |
| Net investment income | $96.0 million | $78.4 million | $178.7 million | $157.6 million |
| Income from continuing operations | $122.1 million | $37.5 million | $277.4 million | $91.1 million |
| Diluted continuing-operations EPS | $1.84 | $0.73 | $4.20 | $1.75 |
| Adjusted consolidated net operating income (non-GAAP) | $91.5 million | $36.5 million | $190.4 million | $94.0 million |
Premium growth was principally acquisition-driven: Infinity, acquired July 2, 2018, contributed $413.6 million of the year-over-year Q2 increase in earned premiums and $803.2 million of the first-half increase. Net income also benefited from investment gains and a $20.1 million payment on a legal judgment. Adjusted operating income excludes specified investment and acquisition items, so it is not directly comparable to GAAP net income.
Segment underwriting and earnings
- Specialty P&C: Q2 segment net operating income was $62.7 million versus $22.4 million; first-half income was $142.3 million versus $45.8 million. The increase reflected Infinity, favorable prior-year reserve development, and improved underlying losses. Combined ratio was 93.5% for Q2 and 91.5% for the first half; underlying combined ratios were 94.0% and 93.0%, respectively.
- Preferred P&C: Q2 segment net operating income was $5.2 million, compared with a $6.0 million loss; first-half income was $8.0 million versus $7.5 million. Lower catastrophe losses helped, but underlying loss ratios worsened, particularly in homeowners. Combined ratio was 103.1% for Q2 and 102.9% for the first half.
- Life & Health: Q2 segment net operating income declined to $13.3 million from $26.7 million; first-half income fell to $36.4 million from $50.8 million. Higher policyholder benefits and expenses weighed on results, including higher-than-expected severity in certain accident and health products.
Cash flow, balance sheet and capital
- First-half operating cash flow was $236.5 million, up from $191.4 million. Investing activities used $413.6 million; financing activities provided $206.4 million. Cash at period-end was $104.4 million, versus $75.1 million at year-end 2018.
- At June 30, total investments were $8.84 billion and shareholders’ equity was $3.68 billion, compared with $8.07 billion and $3.05 billion at December 31, 2018. Accumulated other comprehensive income increased to $276.9 million, chiefly reflecting investment valuation changes.
- Long-term debt was $873.3 million, down from $909.0 million at year-end. The company also had $155.0 million of collateralized investment borrowings, secured by securities with a reported fair value of $177.6 million. Its revolving credit capacity had been increased to $400 million; no revolver borrowings were outstanding at quarter-end.
- Kemper issued 1,552,500 common shares in June for $128.9 million gross proceeds ($127.2 million net). It paid $0.25 per share in Q2 dividends. Parent-company direct cash and investments were $312.7 million, distinct from consolidated cash.
Material changes, outlook and risks
- Post-quarter financing: Kemper borrowed $50 million under a new term loan on July 5, 2019, then redeemed the $150 million principal amount of 7.375% subordinated debentures on July 8. It expected a $5.8 million early-extinguishment loss in Q3.
- Investments: First-half net realized investment gains were $37.4 million, versus $6.4 million a year earlier; gains from changes in fair value of equity and convertible securities were $89.9 million, versus $1.1 million. Net impairment losses recognized in earnings rose to $10.3 million from $0.5 million. These items can vary materially with markets.
- Reserves: P&C prior-year reserves developed favorably by $34.6 million in the first half, compared with $1.6 million of adverse development in 2018. Management cautioned that future reserve development may be favorable or adverse and could materially affect a period’s results.
- Legal contingency: Kemper received $20.1 million in April as partial satisfaction of a $141.7 million judgment against DXC Technology. The company did not recognize the unpaid balance as income and gave no assurance about further collection or timing; DXC was appealing.
- Integration and operating risks: Kemper identified continued Infinity integration as a risk to achieving expected synergies, cost savings, and growth. Other cited exposures include claims severity and catastrophe losses, reserve estimates, regulation and litigation, investment-market changes, competition, and cybersecurity.
- Guidance: The filing text does not provide a clear numerical earnings or revenue forecast. Management stated that it believed P&C subsidiaries maintained adequate liquidity for multiple catastrophe events, while noting that claims, investment sales, and cash needs may fluctuate.
Important facts for investors to verify
- How much of post-acquisition premium and earnings growth is sustainable organic performance versus Infinity’s inclusion, and whether integration benefits are being realized.
- Whether favorable reserve development continues, and whether underlying homeowners and accident-and-health claims trends improve.
- The sustainability and volatility of investment gains, including equity fair-value gains, realized gains, and impairment charges.
- Further collections, appeal outcomes, and timing for the DXC judgment, as well as the expected Q3 debt-extinguishment charge and post-redemption debt costs.
- Insurance-subsidiary dividend capacity, collateral requirements on FHLB borrowings, and the company’s liquidity under severe catastrophe or claims scenarios.