Kemper Corporation — Q1 2017 Form 10-Q
Business context and reporting period
Kemper is an insurance holding company operating Property & Casualty (P&C) and Life & Health insurance businesses. This unaudited report covers the three months ended March 31, 2017, compared with the same period in 2016. Amounts are in millions except per-share data.
Financial results and key metrics
- Revenue: Total revenue was $651.4, up 6.6% from $611.3. Earned premiums rose to $563.4 from $546.0; net investment income increased to $81.6 from $67.0.
- Profit: Net loss narrowed to $0.3 ($0.01 per share) from $2.1 ($0.04 per share). Continuing-operations loss was $0.4 versus $2.2. The company’s non-GAAP consolidated net operating loss worsened to $3.9 from $0.6.
- Segments: P&C net operating loss widened to $22.1 from $13.1. Life & Health net operating income improved to $21.5 from $20.3.
- P&C underwriting: The combined ratio rose to 115.0% from 108.8% (above 100% indicates underwriting losses). The underlying combined ratio improved to 96.8% from 98.8%. Catastrophe losses and LAE were $63.9 versus $37.5; adverse prior-year reserve development was $10.6, compared with favorable development of $2.0.
- Cash flow: Operating cash flow was $48.3, down from $77.2. Investing activities used $32.7, versus $63.0, and financing activities used $11.3, versus $15.5. Consolidated cash ended the quarter at $120.0, up from $115.7 at year-end.
- Balance sheet and liquidity: Total assets were $8,306.8 and shareholders’ equity was $1,983.6. Investments totaled $6,667.9. Parent-company cash and investments were $288.2, compared with $298.7 at year-end. The $225.0 revolving credit facility had no borrowings; insurance subsidiaries could pay an estimated additional $117 in dividends during the rest of 2017 without prior regulatory approval.
- Debt and shareholder returns: Debt was $751.8, including $359.9 of 6.00% senior notes due May 15, 2017. The company anticipated issuing debt in Q2 to refinance a portion of those notes. The quarterly dividend remained $0.24 per share.
Changes versus the prior comparable period
Higher premiums, net investment income, realized investment gains and lower impairment losses helped narrow the GAAP net loss. Investment income benefited substantially from alternative investments: alternative investment income was $15.3 versus $0.4. P&C results deteriorated, principally because of higher catastrophe losses and adverse reserve development, notwithstanding better underlying loss ratios and a lower expense ratio. Life & Health results improved modestly.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or revenue guidance. Management expected a Q2 2017 debt issuance to refinance part of the senior notes due in May.
- Management said interim results require caution given insurance seasonality and reliance on estimates. Reserve outcomes can differ from estimates; the company noted that future reserve development could materially affect results in a period.
- A March 2017 Texas hailstorm contributed to elevated P&C catastrophe losses; homeowners catastrophe losses were $56.5 versus $29.9 a year earlier.
- The company was implementing a multiyear process to compare life policies against death-verification databases and contact potential beneficiaries. Regulatory initiatives, audits and litigation could affect obligations under existing policies; outcomes and ultimate costs were uncertain.
- The company had $83.4 of unfunded commitments to equity-method investment entities, expected to be funded over several years.
- Potential federal tax reform was identified as a risk: a lower corporate tax rate could prompt write-downs of deferred tax assets and affect insurance-subsidiary statutory capital; related changes could also affect tax advantages and investment values.
- Investment results included $10.5 of net realized gains and $5.0 of impairment losses recognized in earnings. Management cautioned that similar gains or losses may not recur. Unrealized investment gains also drove $17.1 of other comprehensive income for the quarter.
Important facts for investors to verify
- Whether the planned refinancing of the May 2017 notes was completed, and its terms and cost.
- Subsequent P&C catastrophe claims and reserve development, particularly personal-auto reserve trends and Texas hail losses.
- Whether alternative-investment income is sustainable and how it affects underlying operating performance.
- Progress, regulatory developments and potential financial effects of the life-policy death-database review.
- Availability of insurance-subsidiary dividends, statutory capital needs and funding of the $83.4 investment commitments.