Kemper Corporation — Q1 2013 Form 10-Q
Business context and period. Kemper is an insurer operating through Kemper Preferred, Kemper Specialty, Kemper Direct, and Life and Health Insurance. This unaudited report covers the three months ended March 31, 2013; comparisons are with Q1 2012 unless noted.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenues | $615.9 million | $611.2 million |
| Earned premiums | $509.9 million | $529.2 million |
| Net investment income | $80.8 million | $77.4 million |
| Income from continuing operations | $58.6 million; $1.00 diluted share | $36.3 million; $0.60 diluted share |
| Net income | $58.4 million; $1.00 diluted share | $43.6 million; $0.72 diluted share |
| Net cash from operating activities | $81.3 million | $55.6 million |
Revenues rose about 1%, while earned premiums declined about 4%. Total expenses decreased to $531.3 million from $560.8 million. Net income included a $0.2 million loss from discontinued operations; Q1 2012 included $7.3 million of discontinued-operations income. The quarterly dividend was $0.24 per share in both periods.
Operating performance. Consolidated net operating income, a company-defined non-GAAP measure, was $42.3 million, up from $33.4 million. Segment net operating income was $18.8 million for Preferred (up from $10.4 million), $3.5 million for Specialty (down from $4.1 million), $6.7 million for Direct (versus a $1.3 million loss), and $21.2 million for Life and Health (down from $27.8 million). Reported segment combined ratios were 94.8% for Preferred, 102.2% for Specialty, and 82.8% for Direct; Direct’s result benefited from favorable prior-year reserve development.
Balance sheet and liquidity. At March 31, total assets were $8.06 billion, investments $6.52 billion, cash $97.5 million, total liabilities $5.88 billion, and shareholders’ equity $2.17 billion. Notes payable were $611.6 million at amortized cost. The company had no borrowings on its $325 million revolving credit facility, with the full amount available; Kemper directly held $187.4 million in cash and investments. Operating cash flow was $81.3 million; investing and financing activities used $60.3 million and $19.8 million, respectively.
Material changes and management commentary
- Income from continuing operations increased by $22.3 million. The increase included higher investment gains: net realized gains were $26.9 million versus $4.9 million, including $24.8 million of gains from corporate bond sales undertaken as part of a review of issuer prospects. Management cautioned that future similar gains or losses are unpredictable.
- Property and casualty reserves had $13.7 million of favorable prior-year development, compared with $5.7 million in Q1 2012. Preferred and Direct contributed favorable development; Specialty had unfavorable development. Catastrophe losses and LAE, excluding prior-year development, were $11.1 million versus $11.4 million.
- Preferred’s results improved with favorable reserve development, higher investment income, and lower catastrophe losses. Management cited higher bodily-injury and collision losses in Preferred auto as a pressure point.
- Specialty premiums declined, principally from lower personal-auto volume; policies in force were approximately 251,000, down from 302,000 at the start of 2012. Commercial-auto profitability was pressured by adverse reserve development and higher expenses.
- Direct’s direct-to-consumer business is in run-off, while worksite, affinity, and renters programs continue. Management expects positive run-off earnings and anticipates a 15%–25% decline in Direct policies in force during 2013.
- Life and Health earnings fell, reflecting lower investment income, higher life benefits, higher catastrophe losses, and increased legal and distribution start-up costs. Some health product sales had been suspended, with a shift toward supplemental products.
Risks, contingencies, and other items
- Unclaimed life benefits: Kentucky’s trial court ruled that its new requirements apply to policies issued before the law’s effective date. Kemper appealed, and enforcement against the company was stayed pending appeal. The company could not reasonably estimate any loss from retroactive application. Life insurers also face a compliance examination involving 38 states and a separate state market-conduct examination. Management warned that retroactive requirements could accelerate benefit payments or escheatment and increase claims costs.
- Investment and market risk: Fixed-maturity fair value was $4.86 billion, including $379.1 million classified as Level 3; 94% of fixed maturities were investment grade. A modeled instantaneous 100-basis-point rate increase reduced estimated fixed-maturity value by $332.2 million, before considering other effects. Q1 comprehensive income was $31.8 million, down from $47.7 million, including a $48.0 million pre-tax unrealized holding loss.
- Other exposures: Unfunded commitments to limited-liability investment companies and partnerships totaled $149.4 million. Insurance results remain exposed to catastrophe frequency and severity, loss-reserve estimates, reinsurance, regulation, litigation, rates, competition, and investment markets.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No broad company-wide earnings guidance was provided in the supplied filing text.
Important facts for investors to verify
- How much of the earnings improvement is repeatable operating performance versus realized investment gains and favorable prior-year reserve development.
- Whether current accident-year loss trends, particularly Preferred auto and Specialty commercial auto, support sustainable underwriting profitability.
- The outcome and potential financial effects of the Kentucky appeal and multistate life-insurance unclaimed-property examinations.
- Whether Direct’s expected 2013 policy decline and run-off earnings expectations are tracking management’s stated outlook.
- Liquidity, investment valuations, and capital impacts if interest rates, equity markets, catastrophes, or claims experience move adversely.