Kemper Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. Kemper operates property and casualty and life insurance businesses through Specialty P&C, Preferred P&C, and Life & Health segments. Results reflect the December 2022 sale of Reserve National. Prior-period figures were recast following adoption of long-duration insurance accounting guidance (LDTI).
Financial results and key metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenues | $1,294.8 million | $1,370.1 million |
| Earned premiums | $1,180.9 million | $1,320.0 million |
| Net investment income | $101.8 million | $100.0 million |
| Loss before tax | $(103.9) million | $(115.7) million |
| Net loss / diluted loss per share | $(80.1) million / $(1.25) | $(86.3) million / $(1.36) |
| Adjusted consolidated net operating loss, non-GAAP | $(65.2) million | $(51.6) million |
| Operating cash flow | $5.2 million | $(18.2) million |
GAAP net loss narrowed by $6.2 million, mainly because investment fair-value results improved; however, adjusted operating loss worsened by $13.6 million, primarily from higher P&C segment losses. Earned premiums fell $139.1 million, with lower volumes in Specialty and Preferred P&C and the Reserve National disposition affecting Life & Health.
- Specialty P&C: Segment net operating loss was $58.4 million versus $44.7 million. Combined ratio was 112.1% versus 108.6%; underlying combined ratio improved to 108.0% from 108.7%. Commercial auto’s underlying loss ratio deteriorated to 81.9% from 70.1%, which management attributed chiefly to higher bodily-injury claim frequency and inflationary severity.
- Preferred P&C: Segment net operating loss was $9.5 million versus $6.1 million. Combined ratio was 116.6% versus 111.6%, while underlying combined ratio improved to 97.1% from 105.1%. Higher catastrophe losses and adverse prior-year development weighed on reported results.
- Life & Health: Segment net operating income increased to $13.2 million from $11.6 million. Earned premiums decreased by $43.5 million, mainly following the Reserve National sale.
Cash, investments, debt, and liquidity: Consolidated cash was $60.6 million at March 31, down from $212.4 million at year-end. Operating cash flow was positive in part because Kemper received a $124.7 million federal tax refund. Investing cash outflow was $138.2 million; financing cash outflow was $18.8 million. Long-term debt was $1,387.5 million at amortized cost. The company reported $520 million available under its $600 million revolving credit agreement and no borrowings under it. Directly held cash and investments at Kemper and non-insurance subsidiaries totaled $240.6 million. Subsidiaries had $601 million of FHLB funding-agreement obligations, supported by $772.9 million of pledged collateral.
Fixed-maturity investments had a fair value of $7,189.4 million against amortized cost of $7,923.6 million; gross unrealized losses were $785.1 million. The portfolio was 95.9% investment-grade. Total comprehensive loss was $19.9 million, compared with $152.5 million in Q1 2022, largely reflecting the change in unrealized investment results.
Material changes, outlook, and risks
- P&C reserves recorded $41.9 million of adverse prior-year loss and LAE development, compared with $2.7 million of favorable development in Q1 2022. Management cautioned that reserve development is uncertain and may materially affect results in a given period.
- Acquisition, disposition, integration, restructuring, and other costs were $29.1 million, versus $4.7 million; management cited increased restructuring costs. These costs contributed to the gap between GAAP and adjusted operating results.
- Management described targeted underwriting actions to improve P&C profitability, including actions that reduced personal-auto new business. Rate increases supported average earned premiums per exposure, but inflation, claim frequency and severity, catastrophes, and reserve development remain important risks.
- No quantified earnings or operating guidance is provided in the filing. Management stated that quarterly results should not be annualized because of insurance seasonality and other factors.
- Kemper adopted LDTI on January 1, 2023, with comparative periods recast. The guidance changes measurement and presentation of long-duration insurance liabilities and deferred acquisition costs. Management reported no Q1 changes to key mortality and lapse assumptions.
- The filing identifies exposure to investment-market and interest-rate movements, catastrophe losses, inflation and social inflation, reinsurance conditions, regulatory and legal developments, and cyber and technology risks. The company said pending legal proceedings were not reasonably expected to have a material effect on its financial statements.
Important facts for investors to verify
- Whether the adverse P&C reserve development and commercial-auto claim trends persist, and how subsequent-period combined and underlying ratios evolve.
- Whether underwriting actions and rate changes improve profitability without further material premium-volume erosion.
- How cash and holding-company liquidity develop after the tax refund, and whether credit availability, insurance-subsidiary dividends, and FHLB collateral remain adequate.
- Whether investment valuations, unrealized fixed-income losses, and alternative-investment returns change materially with market conditions.
- How recurring restructuring and other excluded costs affect the relationship between GAAP net loss and the company’s non-GAAP operating measure.
- The effects of LDTI and any future reserve-assumption updates on reported earnings, insurance liabilities, and comparability.