KEMPER Corp annual report, FY2021

Kemper Corporation — FY2021 Form 10-K

Business context and period. This is Kemper’s annual report for the fiscal year ended December 31, 2021, rather than a standalone fourth-quarter report. Kemper is a U.S. insurance holding company operating Specialty Property & Casualty, Preferred Property & Casualty, and Life & Health segments. It completed its acquisition of American Access Casualty Company (AAC) on April 1, 2021.

Financial performance

MetricFY2021FY2020
Earned premiums$5,253.7 million$4,672.2 million
Total revenues$5,793.0 million$5,205.7 million
Net income (loss)$(120.5) million; $(1.87) per diluted share$409.9 million; $6.14 per diluted share
Adjusted consolidated net operating income (loss), non-GAAP$(218.8) million$438.8 million
Net cash from operating activities$350.7 million$448.0 million
Total assets / shareholders’ equity$14,916.5 million / $4,007.7 million$14,341.9 million / $4,563.4 million
Long-term debt, amortized cost$1,121.9 million$1,172.8 million

Underwriting and segments. Specialty P&C reported a $196.1 million net operating loss, versus $337.9 million income in 2020; its combined ratio rose to 110.6% from 90.8%, and underlying combined ratio to 107.7% from 89.9%. Preferred P&C reported a $12.5 million loss versus $3.5 million income; its combined ratio was 114.2% versus 105.2%. Life & Health income declined to $28.2 million from $60.0 million. A combined ratio above 100% indicates underwriting losses before investment income and other items.

Investment and liquidity. Net investment income increased to $427.3 million from $348.2 million, helped by alternative investments and higher investment balances, while fixed-income yields were lower. Operating cash flow fell by $97.3 million, primarily as P&C claim payments rose. At year-end, cash was $148.2 million and total investments were $10,387.4 million. Kemper directly held $233.9 million in cash and investments, down from $733.2 million. Its $400 million revolving credit facility had no borrowings outstanding. The $275 million 5.000% senior notes mature in September 2022; other senior notes mature in 2025 and 2030. Insurance subsidiaries had $401.9 million of FHLB funding-agreement obligations, secured by pledged securities.

Material changes versus FY2020

  • Net income swung to a loss of $120.5 million, a $530.4 million decrease. Management estimated COVID-19 and related economic conditions reduced FY2021 net results by $485 million; it estimated a $70 million benefit in FY2020.
  • P&C earned premiums rose, particularly in Specialty, reflecting the AAC acquisition, higher volume, and the comparison with prior-year premium credits. Total earned premiums increased $581.5 million.
  • Claim frequency and severity worsened as driving activity returned toward pre-pandemic levels and inflation, labor costs, and supply constraints lifted repair and injury costs. Prior-year P&C reserve development was adverse by $106.7 million, compared with $36.4 million adverse in FY2020. Gross P&C reserves increased to $2,772.7 million from $1,982.5 million.
  • Life & Health results weakened amid excess COVID-related mortality, higher persistency, normalized accident and health claim utilization, and increased distribution investment and commissions.
  • Total comprehensive investment results changed to a loss of $118.2 million from a gain of $458.1 million, mainly because higher interest rates reduced unrealized fixed-maturity gains. Net income also included $114.6 million of gains from fair-value changes in equity and convertible securities and $64.8 million of realized investment gains.
  • FY2021 included the AAC acquisition for approximately $370.9 million in cash consideration. Goodwill increased to $1,312.0 million, including $198.0 million recorded for AAC.

Outlook, risks, and unusual items

  • The filing provides no specific earnings or revenue guidance. Management describes uncertainty around future claim trends, inflation, rate approvals, and the pandemic’s continuing effects.
  • Key risks include reserve-estimation uncertainty, social inflation and litigation, catastrophe losses and reinsurance availability, concentrated personal-auto exposure in California and Florida, regulatory limits or delays in rate increases, investment-market volatility, and cybersecurity and technology risks. California and Florida represented 69% of 2021 personal-auto gross written premiums.
  • Alternative energy partnership investments generated a $61.2 million pretax loss in 2021, alongside $79.0 million of related tax benefits; reported net income attributable to these investments was $17.8 million. Tax credits materially affected the reported tax benefit and effective tax rate.
  • Legal and regulatory matters include initiatives concerning death-verification databases and unclaimed life-insurance benefits. The filing says outcomes are uncertain; it does not provide a clear quantified loss estimate for these matters. Management did not believe other pending proceedings were reasonably likely to materially affect the financial statements.
  • Dividends were $1.24 per share in 2021. The company repurchased $161.7 million of shares during the year; no open-market repurchases occurred in the fourth quarter. Insurance-subsidiary dividends are subject to regulatory limits.
  • The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters included P&C reserves and fair value estimates for certain fixed-maturity securities.

Investor verification priorities

  1. Track whether pricing and underwriting actions offset inflation-driven severity, returning claim frequency, and Florida liability developments; review subsequent reserve development.
  2. Assess the adequacy and uncertainty of the $2.77 billion gross P&C reserve, including Specialty auto reserves and the disclosed $145.3 million one-standard-deviation reserve variability estimate for Specialty personal auto.
  3. Verify refinancing or repayment plans for the $275 million senior notes due in September 2022 and monitor parent-company liquidity and regulated-subsidiary dividend capacity.
  4. Separate recurring investment income and underwriting performance from volatile fair-value movements, realized gains, alternative-investment results, and tax credits.
  5. Review post-acquisition AAC performance, integration costs, and the recoverability of acquisition-related goodwill and intangibles.