Kemper Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone fourth-quarter filing. Kemper is a U.S. diversified insurer with property and casualty and life and health operations.
Financial results and position
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $2,462.3 million | $2,495.0 million |
| Earned premiums | $2,107.1 million | $2,173.6 million |
| Net investment income | $295.9 million | $298.0 million |
| Income from continuing operations | $91.8 million; $1.54 diluted per share | $61.7 million; $1.02 diluted per share |
| Net income | $103.4 million; $1.74 diluted per share | $74.5 million; $1.23 diluted per share |
| Net cash from operating activities | $65.7 million | $(25.0) million |
| Total assets / shareholders’ equity | $8,009.1 million / $2,161.7 million | $7,934.7 million / $2,116.6 million |
| Notes payable | $611.4 million | $610.6 million |
- Cash was $96.3 million at year-end, versus $251.2 million a year earlier. Kemper also had $327.5 million in short-term investments and a fully undrawn $325 million revolving credit facility, available through March 2016.
- The investment portfolio totaled $6.46 billion; 93% of fixed maturities were investment grade. Net realized investment gains increased to $65.4 million from $33.7 million, including $44.9 million from sales of municipal securities.
- Property and casualty reserves were $970.6 million, down from $1,029.1 million. Total favorable prior-year reserve development was $31.5 million before tax, compared with $33.1 million.
- Common dividends were $0.96 per share, unchanged from 2011. Kemper repurchased 2.0 million shares for $60.7 million during 2012.
Changes versus the prior year
- Net income rose $28.9 million, while continuing-operations income rose $30.1 million. The improvement included higher realized investment gains and lower catastrophe losses; consolidated net operating income, a non-GAAP measure, was $53.8 million versus $47.1 million.
- Earned premiums fell $66.5 million, primarily reflecting declines in Kemper Direct ($54.7 million) and Kemper Specialty ($25.4 million), partly offset by growth in Kemper Preferred.
- Continuing-operations catastrophe losses, excluding prior-year reserve development, declined to $124.5 million from $163.8 million. FY 2012 included $48.5 million related to Superstorm Sandy.
- Segment net operating results were mixed: Preferred lost $11.2 million (versus a $17.6 million loss); Specialty earned $1.2 million (versus $19.8 million); Direct lost $0.9 million (versus a $27.5 million loss); and Life and Health earned $90.8 million (versus $98.9 million).
- Reported combined ratios were 108.3% for Preferred, 105.3% for Specialty, and 111.1% for Direct. Direct’s 2011 comparison included a $13.5 million intangible-asset write-off. These segment ratios are not company-wide margins.
Outlook, risks and unusual items
- Kemper Direct ceased direct-to-consumer marketing and placed those operations in run-off, while continuing worksite, affinity and renters programs. Management expected positive earnings from the run-off and projected a 15%–25% decline in policies in force over the following 12 months.
- Reserve National suspended sales of certain health products affected by federal health-care requirements. Management expected 2013 earned premiums from those products to decline about 20%, with supplemental products expected to offset much of the decrease; the impact of health-insurance exchanges beginning in 2014 remained uncertain.
- The company’s 2013 catastrophe reinsurance program for its principal P&C segments retained the first $50 million of covered catastrophe losses, with layered coverage above that level. Estimated annual premium was $23.4 million. The Life and Health segment did not renew its primary catastrophe program for 2013, apart from Florida Hurricane Catastrophe Fund coverage, as it continued running off dwelling policies.
- A key contingency involves state initiatives requiring insurers to search death records and potentially accelerate payment or escheatment of life benefits. Kemper’s life insurers faced a compliance examination involving 38 states and a market-conduct exam; Kemper challenged retroactive application of Kentucky’s law. The company could not reasonably estimate any potential loss.
- Other significant risks include catastrophe severity and reinsurance recoverability, uncertainty in loss reserves and pricing, interest-rate and investment-credit exposure, concentrated distressed/mezzanine investment exposure, regulatory change, and dependence on subsidiary dividends. Equity-method and other limited-liability investments totaled $394.3 million, with $141.5 million in related unfunded commitments.
- Adoption of new insurance-acquisition-cost accounting was applied retrospectively. It reduced 2012 net income by $6.3 million and year-end shareholders’ equity by $105.8 million versus the prior accounting treatment. The 2011 comparative figures were also adjusted.
- Fourth-quarter 2012 net income was $1.9 million, including a $1.7 million loss from continuing operations. FY 2012 financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether Direct’s run-off produces the expected positive earnings and how quickly its policy base and costs decline.
- Whether Specialty’s deterioration and Preferred’s underwriting losses improve; review current-year loss trends separately from catastrophe losses and prior-year reserve releases.
- The adequacy and sensitivity of loss reserves, including the disclosed $34.7 million potential variability in Preferred automobile reserves under the stated one-standard-deviation scenario.
- Potential financial and cash-flow effects of unclaimed-property laws, examinations, and litigation concerning life-insurance benefit practices.
- Investment portfolio credit quality, valuation of less-observable assets, unfunded investment commitments, and sensitivity to interest-rate and equity-price changes.
- Availability of subsidiary dividends, compliance with credit-facility covenants, and capacity to sustain shareholder dividends and repurchases.