Kemper Corporation — Q3 2017 Form 10-Q
Business context and period. Kemper is an insurance holding company operating Property & Casualty (P&C) and Life & Health segments. This unaudited filing covers the quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $690.3 | $640.7 | $2,026.1 | $1,879.2 |
| Income (loss) from continuing operations | $47.8 | $(18.3) | $84.0 | $(16.4) |
| Net income (loss) | $47.7 | $(16.3) | $84.0 | $(14.4) |
| Diluted earnings (loss) per unrestricted share | $0.92 | $(0.36) | $1.62 | $(0.31) |
| Net investment income | $85.9 | $77.7 | $244.6 | $218.4 |
- Earned premiums increased 7.0% in Q3 to $598.2 and 5.2% year to date to $1,744.1. P&C premiums grew substantially, especially nonstandard personal auto; Life & Health growth was more modest.
- Q3 segment net operating income was $22.9 for P&C and $23.5 for Life & Health. Year-to-date segment results were $5.7 and $65.5, respectively. Consolidated net operating income, a non-GAAP measure, was $44.4 in Q3 and $61.5 year to date.
- P&C combined ratio improved to 99.4% in Q3 from 101.2%; year-to-date it was 105.9% versus 106.4%. Underlying combined ratios improved to 92.6% in Q3 and 94.4% year to date, reflecting better underlying results and expense ratios. Catastrophe claims and adverse prior-year reserve development weighed on reported results.
- Investment gains and impairments affected reported earnings: year-to-date realized investment gains were $45.0 versus $24.0, while impairment losses were $10.5 versus $24.0. Q3 realized gains were $8.1 versus $11.6; impairment losses were $2.9 versus $8.3.
Cash flow, balance sheet and debt
- For the first nine months, operating cash flow was $164.5, compared with $170.5 in 2016; investing activities provided $50.5, versus $122.6 used; financing activities used $193.1. Cash rose $21.9 to $137.6.
- At September 30, total investments were $6,651.1, total assets $8,301.0, and shareholders’ equity $2,082.4. Long-term debt was $592.2, down from $751.6 at year-end 2016. The company had no borrowings on its $225.0 revolving credit facility.
- Kemper issued an additional $200 million of 4.35% senior notes in June and repaid $360 million of long-term debt during the nine-month period. Parent-held cash and investments were $188.2, versus $298.7 at year-end.
- Quarterly dividends were $0.24 per share; $37.1 was paid during the nine months. Insurance subsidiaries paid $88.1 in dividends to Kemper, and management estimated approximately $30 million of additional dividends could be paid in the remainder of 2017 without prior regulatory approval.
Material changes, outlook and risks
- The earnings rebound primarily reflects improved P&C underlying losses and expenses, higher investment income, and the absence of a prior-year Life & Health charge. The 2016 period included a $77.8 pretax ($50.5 after-tax) charge related to using death-verification databases and estimating unpaid life claims.
- Reserve development reversed: P&C reserves had $19.7 of adverse development in the first nine months of 2017, compared with $21.0 of favorable development in 2016. Management cautions that reserve estimates may change and such development could materially affect period results.
- California wildfires began in October 2017. Kemper expects significant fourth-quarter catastrophe losses and LAE, potentially triggering reinsurance recoveries, but had not completed its exposure assessment and provided no estimate of ultimate losses.
- A vendor arbitration resulted in an October 2 partial award of $84.3 in direct damages to Kemper, plus prejudgment interest and potentially certain costs. The vendor may challenge the award; confirmation proceedings are pending. The gain contingency was not recognized in these financial statements, and collection timing and final amount remain uncertain.
- No numerical earnings guidance is provided. Management identifies catastrophe severity, claims and reserve trends, investment returns, regulatory and legal developments, competition, and tax-law changes as risks. A possible federal corporate tax-rate reduction could require deferred-tax-asset write-downs and affect insurance-subsidiary statutory capital.
- Investment income growth was driven substantially by alternative investments, whose returns can vary. About 90% of fixed maturities were investment grade. The company also reported $82.5 of commitments to equity-method investments and $133.0 of unfunded commitments to certain other limited-liability investments.
Important facts for investors to verify
- Subsequent wildfire loss estimates, reinsurance recoveries, and the effect on Q4 earnings and capital.
- Whether the arbitration award is confirmed, the final interest and cost award, any challenge, and actual collection.
- Persistence of improved nonstandard auto results, alongside preferred auto deterioration and adverse P&C reserve development.
- Alternative-investment returns and the sensitivity of investment income and fair values to market conditions.
- Parent liquidity, subsidiary dividend capacity, debt repayment and issuance details, and remaining investment commitments.
- Potential tax-law changes and their effect on deferred tax assets, statutory capital, and investment values.