Kemper Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. Kemper operates Property & Casualty and Life & Health insurance businesses.
Financial results and liquidity
| Metric | Nine months 2018 | Nine months 2017 | Q3 2018 | Q3 2017 |
|---|---|---|---|---|
| Total revenue | $2,630.4 | $2,026.1 | $1,195.5 | $690.3 |
| Net income | $183.6 | $84.0 | $92.2 | $47.7 |
| Diluted earnings per unrestricted share | $3.23 | $1.62 | $1.40 | $0.92 |
| Net investment income | $249.6 | $244.6 | $92.0 | $85.9 |
- Earned premiums rose to $2,320.8 for the first nine months from $1,744.1; the July 2 acquisition of Infinity contributed $377.9 of the increase. Q3 earned premiums were $1,052.9 versus $598.2.
- Adjusted consolidated net operating income, a non-GAAP measure, was $198.5 for nine months versus $61.5, and $104.5 for Q3 versus $44.4. Results included gains and tax benefits described below; this measure is not a substitute for GAAP income.
- Operating cash flow was $345.3 versus $164.5 in the first nine months. Investing activities used $516.7, including $560.6 net cash for Infinity; financing activities provided $218.5. Ending cash was $92.8, compared with $137.6 at September 30, 2017.
- At September 30, total investments were $8,246.6, total assets $11,772.6, shareholders’ equity $3,063.8, and total debt at amortized cost $1,123.7, up from $592.3 at year-end 2017. Debt included a $249.4 term loan due 2020 and Infinity’s $275.0 principal amount of 5% notes due 2022. The $300.0 revolving facility had no borrowings outstanding.
- Parent-held cash and investments were $91.3. Insurance subsidiaries paid Kemper $130.4 in dividends during the first nine months; an estimated additional $70.6 could be paid during the remainder of 2018 without prior regulatory approval. Quarterly shareholder dividends remained $0.24 per share.
Performance changes and insurance margins
- Net income increased $99.6 for the nine months. Management attributed improvement principally to stronger P&C results, lower catastrophe losses, favorable reserve development, lower underlying P&C losses relative to premiums, and Infinity’s contribution. Q3 net income increased $44.5 year over year.
- P&C segment net operating income was $79.4 for nine months versus $5.7; Q3 was $28.2 versus $22.9. Its combined ratio improved to 99.0% for nine months from 105.9%, but was 99.8% in Q3 versus 99.4%. The underlying combined ratio was 95.3% for nine months versus 94.4%, and 98.0% in Q3 versus 92.6%.
- P&C catastrophe losses were $69.6 for nine months versus $128.2. Prior-year P&C reserve development was favorable by $1.7 versus adverse development of $19.7 in 2017. Homeowners underlying loss ratios worsened to 54.1% for nine months from 51.7%, and to 58.9% in Q3 from 55.4%.
- Life & Health segment net operating income rose to $76.9 from $65.5 for nine months and to $26.7 from $23.5 for Q3, principally reflecting lower tax rates. Lower investment returns and higher benefits in parts of the business partly offset gains.
Material events, outlook and risks
- Kemper completed its approximately $1.55 billion acquisition of Infinity on July 2, issuing 13.18 million shares valued at $982.5 and paying $564.6 in cash. The preliminary purchase-price allocation included $768.2 of goodwill and $262.7 of acquired intangible assets; valuation remained incomplete and could change. Infinity results are included from the acquisition date.
- Q3 results included a $35.7 gain from partial satisfaction of a court judgment against CSC/DXC. The court entered a $141.7 judgment; DXC indicated it would appeal. The unpaid balance is an unrecognized gain contingency, and Kemper gave no assurance as to further collection or timing.
- A $26.0 tax benefit was recorded in Q3 after finalizing certain Tax Act deferred-tax effects. Kemper expected to complete remaining determinations in Q4 2018.
- Acquisition-related transaction, integration and other costs were $38.0 for nine months and $28.2 for Q3. Management also cited a headquarters lease termination charge and higher interest expense as offsets to year-over-year earnings growth; the filing does not provide a clear amount for the lease charge in the text presented.
- Net other comprehensive loss was $181.6 for nine months, largely reflecting unrealized investment holding losses; total comprehensive income was only $2.0 despite net income of $183.6. Adoption of new equity-investment accounting also moves fair-value changes into earnings and may increase reported earnings volatility.
- Key risks include catastrophe frequency and severity, uncertainty in insurance reserves and claims inflation, investment-market and interest-rate fluctuations, regulatory and legal developments, competition, acquisition integration and synergy realization, and cybersecurity or technology disruption. Management provided no specific earnings guidance in the filing.
Important facts for investors to verify
- Progress on Infinity integration, purchase accounting, cost savings, and the effect of acquired intangible amortization on P&C expense ratios.
- Subsequent development of P&C reserves, especially homeowners and auto losses, and whether recent combined-ratio performance is sustainable.
- Appeal and collection status of the CSC/DXC judgment, including any recovery beyond the $35.7 already recognized.
- Final Tax Act deferred-tax calculations and any effects on reported earnings, cash taxes, or deferred-tax balances.
- Debt service and liquidity following the acquisition, as well as exposure to unrealized investment losses and market movements.