Kemper Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Kemper operates in preferred and specialty property and casualty insurance and life and health insurance. Results include Infinity, acquired July 2, 2018; comparisons therefore reflect a longer period of Infinity ownership in 2019.
Financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenues | $1,243.8m | $1,195.5m | $3,755.5m | $2,630.4m |
| Income from continuing operations / net income | $129.0m | $92.3m / $92.2m | $406.4m | $183.4m / $183.6m |
| Diluted EPS | $1.91 | $1.40 | $6.10 | $3.23 |
| Adjusted consolidated net operating income, non-GAAP | $130.0m | $104.5m | $320.4m | $198.5m |
Q3 earned premiums were $1,135.2m, up from $1,052.9m. Nine-month earned premiums were $3,326.6m, versus $2,320.8m. Nine-month net investment income rose to $270.4m from $249.6m; Q3 was approximately flat at $91.7m versus $92.0m. Nine-month investment fair-value income and realized gains were $99.7m and $39.1m, respectively, versus $12.1m and $10.0m in 2018.
Underwriting: Preferred P&C’s combined ratio was 99.4% for nine months (104.7% prior year) and 92.4% in Q3 (103.3% prior year). Specialty P&C’s ratios were 91.5% (96.7%) and 91.6% (99.1%), respectively. These results include catastrophe losses and prior-year reserve development. Life & Health segment net operating income was $69.8m for nine months, down from $77.9m; Q3 improved to $33.4m from $27.1m.
Cash, liquidity, and capital
- Nine-month operating cash flow was $366.5m, compared with $345.3m; investing used $381.2m and financing provided $73.2m. Cash ended at $133.6m, up from $75.1m at year-end 2018.
- At September 30, total investments were $8,974.1m and shareholders’ equity was $3,894.2m. Fixed-maturity fair value was $6,883.6m.
- Long-term debt was $778.7m, down from $909.0m at year-end; collateralized investment borrowings were $137.6m. A $400m unsecured credit facility had no borrowings outstanding.
- Kemper’s parent directly held cash and investments of $169.1m. Insurance subsidiaries paid $279m in dividends to Kemper and received an $85m capital contribution during the first nine months. A further estimated $49m of subsidiary dividends could be paid without prior regulatory approval during the remainder of 2019.
Changes, outlook, and risks
- Nine-month net income increased by $222.8m. Management attributed the improvement primarily to higher adjusted operating income, investment results, and lower acquisition-related costs. Specialty P&C was the largest contributor, reflecting Infinity’s inclusion for nine months rather than three, as well as favorable loss development and improved expenses.
- Q3 adjusted net operating income increased $25.5m year over year, led by Specialty P&C; lower Infinity purchase-accounting amortization contributed to the segment’s improvement.
- Property and casualty reserves benefited from $55.8m of favorable prior-year development for the first nine months. The Life & Health segment recorded a $15.0m reduction in its estimate of costs related to death-verification database use. These estimates and reserve development may not recur.
- Management gave no specific earnings or revenue guidance in the provided filing text. It cautioned that actual results may differ due to catastrophe frequency and severity, reserve-estimate changes, investment-market performance, regulation and litigation, competition, cybersecurity, and risks in completing Infinity integration and realizing expected benefits.
- Kemper completed redemption of $150m principal of 7.375% subordinated debentures in July and recorded a $5.8m early-extinguishment loss. It also issued $49.9m under a 2023 term loan and raised $127.2m net through a common-stock offering.
- A court judgment against DXC Technology was confirmed at $141.7m. Kemper had received $55.8m in partial payments; collection of the remaining amount is uncertain and the unpaid balance is not recognized as income. The company also reported ordinary-course legal and regulatory matters and ongoing uncertainty around life-insurance death-verification initiatives.
Important facts for investors to verify
- How much of earnings growth reflects ongoing underwriting performance versus Infinity’s consolidation, investment gains, favorable reserve development, and the $15m estimate adjustment.
- Whether underlying loss trends and pricing remain adequate, particularly in personal auto and accident and health insurance.
- Future development of property and casualty reserves and the assumptions supporting favorable prior-year releases.
- Progress and costs of Infinity integration, and whether expected synergies and cost savings are achieved.
- Collection prospects and timing for the unrecognized balance of the DXC judgment, plus any effects of evolving death-verification requirements.
- Exposure to investment valuation and credit risk, including Level 3 holdings, alternative investments, and commitments to fund investments.