Kemper Corporation — FY 2016 Form 10-K
Business context and reporting period. Kemper is a U.S. insurance holding company operating Property & Casualty (P&C) and Life & Health (L&H) segments. This 10-K covers the fiscal year ended December 31, 2016; quarterly figures below provide context for Q4. Amounts are in millions of dollars unless stated otherwise.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total revenue | $2,521.9 | $2,340.8 |
| Earned premiums | $2,220.0 | $2,009.6 |
| Net investment income | $298.3 | $302.6 |
| Income from continuing operations | $12.7 | $80.2 |
| Net income | $16.8 | $85.7 |
| Diluted earnings per share | $0.33 | $1.65 |
| Net cash provided by operating activities | $240.5 | $215.0 |
| Cash at year-end | $115.7 | $161.7 |
| Long-term debt, current and non-current | $751.6 | $750.6 |
| Total assets / shareholders’ equity | $8,210.5 / $1,975.2 | $8,036.1 / $1,992.4 |
- FY 2016 P&C earned premiums were $1,614.8, up from $1,415.2; segment net operating loss was $2.9 versus income of $26.7. Its reported combined ratio was 105.6%; underlying combined ratio was 99.7%.
- FY 2016 L&H earned premiums were $605.2 versus $594.4; segment net operating income fell to $30.3 from $71.7.
- Q4 2016 net income was $31.2, including $29.1 of continuing-operations income. Q4 2015 net income was $4.6, including $1.3 from continuing operations.
- Cash flows: operating activities provided $240.5; investing activities used $238.1; financing activities used $48.4. The company paid $49.2 in shareholder dividends ($0.96 per share) and repurchased $3.8 of shares.
- Liquidity and capital: Kemper held $298.7 of cash and investments directly at year-end and had $225.0 available under its undrawn revolving credit agreement. Insurance subsidiaries’ statutory capital exceeded applicable minimum RBC requirements.
Material changes versus FY 2015
- Net income declined $68.9, primarily reflecting lower segment operating results, fewer realized investment gains, and a significant L&H claims-reserve charge. Premium growth largely reflects the full-year inclusion of Alliance United, acquired in April 2015.
- L&H recorded a $77.8 pretax charge in 2016 after voluntarily beginning to compare life policies against death-verification databases and initiate beneficiary outreach. Management reported a $50.5 after-tax impact on L&H segment results and expects approximately $80 of claims to be paid over several years.
- P&C catastrophe losses and LAE, excluding prior-year reserve development, increased to $109.6 from $64.5. Two Texas hailstorms accounted for estimated losses of $36.0 and $27.4.
- Net investment income decreased $4.3; net realized investment gains fell to $33.1 from $52.1, while impairment losses recognized in earnings rose to $32.7 from $27.2.
- Net favorable prior-year reserve development in continuing operations was $14.4, compared with $11.5 in 2015. P&C reserves totaled $884.1, up from $800.5.
Outlook, management commentary, and risks
- Management intended to issue at least $250 of 10-year senior notes in Q2 2017 to refinance $360 of 6.00% senior notes maturing May 15, 2017. This is a stated intention, not completed financing. A Treasury-rate hedge had a $1.6 fair value at year-end.
- Alliance United’s underlying loss ratio was 94.0% in 2016 and worsened year over year. Kemper cited higher claim frequency and severity, inadequate rates, and claims-adjuster capacity; it was slowing new-business growth, increasing claims staffing, managing agencies, and implementing rate increases. Management expected several more pricing cycles to reach adequate rates.
- Risks include catastrophe severity and reinsurance availability or recoverability; uncertainty in claims reserves and pricing; regulatory limits on rates and subsidiary dividends; investment-market and low-interest-rate exposure; cybersecurity and system availability; and litigation or changing requirements concerning life-policy death searches and unclaimed property.
- The company had $360 of debt due in 2017 and depended on regulated subsidiary dividends for parent-company obligations and shareholder returns. It estimated subsidiaries could pay $133 in dividends to Kemper in 2017 without prior regulatory approval.
- Other unusual items: the company froze substantially all defined-benefit pension accruals effective June 30, 2016, and amended retiree medical coverage effective December 31, 2016. The auditor issued an unqualified opinion and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Progress and ultimate cost of the death-database review, including whether the approximately $80 of expected claims and associated reserves prove adequate.
- Alliance United’s loss trends, rate actions, claims-handling capacity, and path to underwriting adequacy.
- Renewal terms and protection limits of catastrophe reinsurance, particularly as existing coverage expires, and the effect of future catastrophe seasons.
- Execution and cost of the planned 2017 debt refinancing, alongside available parent liquidity and restrictions on insurance-subsidiary dividends.
- Investment impairment trends, returns from alternative investments, and sensitivity of portfolio values and income to interest-rate and equity-market changes.
- Development of P&C reserves and the sustainability of favorable prior-year reserve releases; the filing estimates personal-auto reserve variability of $66.8 under its stated one-standard-deviation scenario.