Kemper Corporation — Q2 2014 Form 10-Q
Business context and reporting period. This unaudited report covers the three and six months ended June 30, 2014. Kemper operates Property & Casualty (P&C) and Life & Health insurance businesses. In Q1, it consolidated its P&C businesses into one reportable segment and reclassified certain prior-period segment figures.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $542.5 million | $588.9 million | $1,097.1 million | $1,204.8 million |
| Income from continuing operations | $9.3 million | $32.5 million | $44.5 million | $91.1 million |
| Net income | $9.3 million | $34.0 million | $44.4 million | $92.4 million |
| Diluted EPS | $0.17 | $0.59 | $0.80 | $1.59 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $72.6 million | $76.6 million |
- For the first half, earned premiums fell 7.3% to $947.9 million; net investment income declined 7.5% to $143.7 million. Net realized investment gains fell to $10.1 million from $29.2 million, while investment impairment losses increased to $4.9 million from $2.9 million.
- Q2 P&C segment net operating loss was $1.2 million, versus income of $19.1 million a year earlier. Life & Health segment net operating income was $15.9 million, down from $20.3 million. First-half segment net operating income was $13.2 million for P&C and $38.0 million for Life & Health.
- P&C combined ratio was 107.6% in Q2 and 103.5% for the first half, compared with 98.9% and 97.3%, respectively, in 2013. The underlying combined ratio was 94.3% in Q2 and 96.8% for the first half. Higher catastrophe losses drove the deterioration in the reported ratio.
Balance sheet, debt and liquidity
- At June 30, total assets were $7.97 billion, total liabilities $5.83 billion, and shareholders’ equity $2.14 billion. Cash was $61.8 million and total investments were $6.52 billion.
- Debt at amortized cost was $751.7 million, up from $606.9 million at year-end 2013. Kemper issued $150 million of 7.375% subordinated debentures due 2054, receiving net proceeds of $144.2 million (effective yield 7.69%). It had no borrowings on its $225 million revolving credit facility.
- Kemper directly held $302.7 million of cash and investments at June 30, compared with $156.7 million at year-end. Insurance subsidiary Trinity paid a $100 million dividend to Kemper in the first half. The company estimated subsidiaries could pay a further $117 million without prior regulatory approval for the rest of 2014, and expected at least $79 million of that amount.
- Cash used in investing activities was $125.7 million, largely reflecting a $198.0 million net increase in short-term investments. Financing activities provided $48.4 million, including subordinated-debt proceeds; share repurchases used $70.1 million and dividends $26.6 million. Cash declined $4.7 million to $61.8 million.
Changes, outlook and risks
- First-half net income declined $48.0 million year over year. Lower premiums, investment income and realized gains contributed; P&C results were also pressured by catastrophe losses. P&C catastrophe losses excluding reserve development were $77.9 million for the half versus $34.6 million in 2013, including one event exceeding $25 million. Favorable prior-year P&C reserve development was $34.3 million, versus $33.4 million in 2013.
- Personal-auto earned premiums contracted primarily due to lower policy volume, including the run-off of direct-to-consumer business; rate increases partly offset the decline. Management cited improved underlying loss ratios in several major P&C lines, but higher catastrophe losses and lower premium volume increased expense ratios. Life & Health premium declines reflected run-off in certain health products; Reserve National’s expanded distribution contributed growth in some life products.
- No specific earnings or revenue guidance was provided in the supplied filing text. Management cautioned that interim insurance results are affected by seasonality, estimates and market conditions, and that investment gains or losses may vary between periods.
- A material uncertainty concerns state initiatives and litigation over whether life insurers must proactively compare in-force policies with death records and potentially accelerate benefit payments or escheatment. Kemper said the possible loss could not be reasonably estimated. Kentucky and Maryland appeals and multi-state audits/examinations remained pending; the California case was stayed, and an Illinois court allowed one key challenge to proceed.
- Other stated risks include catastrophe frequency and severity, reserve-estimate variability, investment market and interest-rate exposure, regulation, competition, and data security. A modeled instantaneous 100-basis-point rate increase and 30% equity-market decline indicated potential fair-value reductions, including $315.4 million for fixed maturities and $147.7 million for equity-price risk on equity securities; these are sensitivities, not forecasts.
- Kemper repurchased 2.1 million shares for $76.6 million in the first half. It repurchased another 0.8 million shares for $29.9 million in July, substantially completing the prior program. On August 6, the board approved a new authorization of up to $300 million. The quarterly dividend remained $0.24 per share.
Most important facts to verify
- Whether P&C underwriting improves as catastrophe losses normalize, and whether premium-volume declines continue to pressure expense ratios.
- The adequacy of P&C reserves and sustainability of favorable prior-year reserve development.
- Developments in unclaimed-property litigation and state audits, including potential effects on benefit timing, claims costs, cash flows and reputation.
- Investment returns, impairments and sensitivity to interest rates and equity markets, particularly given the portfolio’s Level 3 valuations and investment commitments.
- Debt service and capital allocation following the new subordinated issuance, substantial share repurchases and renewed $300 million authorization.