Kemper Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. Kemper is a U.S. insurance holding company operating Property & Casualty and Life & Health businesses. Unless otherwise noted, figures are in U.S. dollars; financial amounts are in millions.
Financial performance and condition
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $2,196.6 | $2,426.5 |
| Earned premiums | $1,862.2 | $2,025.8 |
| Income from continuing operations | $112.6 | $214.5 |
| Net income | $114.5 | $217.7 |
| Diluted EPS | $2.12 | $3.80 |
| Net investment income | $309.1 | $314.7 |
| Net cash provided by operating activities | $133.6 | $122.1 |
| Total assets | $7,833.4 | $7,656.4 |
| Shareholders’ equity | $2,090.7 | $2,051.5 |
- Revenue declined 9.5%, earned premiums fell 8.1%, and net income declined 47.4% year over year. Fourth-quarter 2014 revenue was $559.7, continuing-operations income $63.3 and net income $65.4; fourth-quarter 2013 net income was $55.2.
- Property & Casualty: earned premiums were $1,249.5, down $143.4. Segment net operating income fell to $24.9 from $100.6. The combined ratio rose to 103.7% from 96.6%; the underlying combined ratio was 100.4% versus 97.4%. Underlying losses improved, but catastrophe losses and a software write-off weighed on results.
- Life & Health: earned premiums were $612.7, down $20.2; segment net operating income increased to $91.8 from $89.3.
- Catastrophe losses and LAE were $98.5 before tax, versus $50.7 in 2013. Prior-year reserve development was favorable by $57.1, compared with $64.6 in 2013. Property & Casualty reserves totaled $651.1 at year-end, down from $742.6.
- Cash and investments directly held by the parent totaled $330.3, compared with $156.7 a year earlier; consolidated cash was $76.1. The company had no borrowings on its $225.0 million revolving credit facility, which expires in March 2016.
- Debt principal totaled $760: $250 due November 2015, $360 due May 2017 and $150 of subordinated debt due 2054. Balance-sheet debt carrying value was $752.1. The company was evaluating repayment or refinancing alternatives for the 2015 maturity.
- Fixed-maturity investments had a fair value of $4,777.6; 92% were investment grade. Insurance subsidiaries’ statutory capital exceeded applicable minimum RBC levels. Their 2014 dividends to Kemper totaled $217.5; an estimated $218 could be paid in 2015 without prior regulatory approval.
Material changes versus prior year
- The earnings decline primarily reflected higher catastrophe losses, the $54.6 pretax write-off of internal-use software, lower realized investment gains, lower premiums and reduced investment income. The 2013 comparison included a $43.6 pretax gain on sale of the headquarters building.
- Property & Casualty catastrophe losses increased to $96.5 from $47.1. Underlying non-catastrophe losses as a percentage of earned premiums improved to 67.7% from 70.4%, but expense ratio excluding the software write-off increased to 28.3% from 27.0%.
- Personal-auto and homeowners premium volume fell, primarily reflecting prior pricing and segmentation actions; higher average premiums partly offset the volume decline. Life & Health premiums declined as certain health products ran off, including products affected by federal health-care law.
- Net realized investment gains declined to $39.1 from $99.1. 2014 included $21.6 of net gains from equity-security sales; the prior-year result included the headquarters-building gain.
- Book value per share increased to $39.88 from $36.86. Kemper repurchased 3.2 million shares for $115.5 and paid $0.96 per share in dividends, unchanged from 2013.
Outlook, risks, contingencies and unusual items
- Kemper agreed to acquire Alliance United Group for approximately $70 million in cash, with closing expected in the first half of 2015 subject to regulatory and customary approvals. It planned to contribute approximately $75 million to support the acquired insurer; Alliance United reported more than $300 million of 2014 direct written premiums.
- Management expected premiums from health-care-law-affected products to decline approximately 50% in 2015, with supplemental-product growth expected to offset much of the reduction. The filing does not provide company-wide earnings guidance.
- The 2015 catastrophe reinsurance program provides 95% coverage for specified loss layers above a $50 million retention, up to $350 million; estimated 2015 program premium was $14.5 million. Reinsurance does not remove the insurers’ direct obligations to policyholders.
- Material legal and regulatory uncertainty concerns state efforts to require life insurers to compare in-force policies with death databases and potentially apply new requirements retroactively. Litigation and examinations were ongoing; Kemper stated it could not reasonably estimate any resulting loss. The company was complying with Maryland’s statute while appealing, and Kentucky’s appeals court had ruled against retroactive application, subject to possible further review.
- Other key risks include catastrophe frequency and severity, reserve-estimation uncertainty, reinsurance availability and collectability, investment-market and interest-rate exposure, regulatory limits on insurance-subsidiary dividends, competitive and rating pressures, cyber/security and technology risks, and performance of recently expanded Life & Health distribution channels.
- The pension plan reported a $91.0 underfunded status at year-end, versus a $9.0 surplus in 2013, primarily following a lower discount rate and revised mortality assumptions. Management anticipated higher pension expense in 2015.
Important facts for investors to verify
- Whether P&C underwriting returns improve from the 103.7% combined ratio, and whether premium volume stabilizes without weakening pricing discipline.
- How much 2014 earnings depended on favorable prior-year reserve releases and whether future catastrophe losses remain within reinsurance protection.
- Progress and financial impact of the Alliance United acquisition, including regulatory approval, closing, and the planned capital contribution.
- Funding or refinancing plans for the $250 million 2015 debt maturity and the parent’s liquidity after repurchases, dividends and acquisition costs.
- Developments in death-database/unclaimed-property litigation and any resulting claims costs, cash-flow acceleration or regulatory requirements.
- Investment income sustainability, including the contribution from unusual equity dividends, and the impact of market movements on portfolio values and pension obligations.