Kemper Corporation (KMPR) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Kemper operates property and casualty insurance and life and health insurance businesses through three segments: Specialty P&C, Preferred P&C, and Life & Health. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenues | $1,455.4 | $1,353.7 | $4,315.1 | $3,813.6 |
| Earned premiums | $1,356.1 | $1,206.5 | $3,894.6 | $3,458.2 |
| Net investment income | $101.9 | $92.1 | $318.9 | $245.5 |
| Income (loss) before taxes | $(129.8) | $152.1 | $(97.9) | $389.5 |
| Net income (loss) | $(75.3) | $122.3 | $(14.7) | $312.4 |
| Diluted loss per share | $(1.18) | — | $(0.23) | — |
Revenue increased year over year, but higher policyholder benefits and incurred losses, insurance expenses, and other expenses drove the company to losses. Adjusted consolidated net operating loss, a non-GAAP measure, was $75.8 for Q3 and $88.0 for the nine months, compared with income of $90.9 and $333.0, respectively, in 2020.
- Underwriting: Specialty P&C reported nine-month net operating loss of $70.9, versus income of $246.8; its combined ratio rose to 107.6% from 90.6% and underlying combined ratio to 103.5% from 89.6%. Q3 combined ratio was 111.6%, versus 86.3%.
- Preferred P&C: Nine-month net operating loss narrowed to $5.1 from $13.4. Its combined ratio was 113.6%, versus 108.2%; Q3 improved to 116.6% from 129.9%, largely reflecting lower catastrophe losses than in the prior-year quarter.
- Life & Health: Nine-month net operating income fell to $23.1 from $50.6; Q3 income was $2.8, versus $12.2. Management cited higher COVID-19-related life mortality, greater claim frequency and severity in accident and health, and increased expenses.
Cash, balance sheet and capital
- Operating cash flow was $307.6 for the first nine months, versus $251.3 in 2020. Investing activities used $99.0; financing activities used $294.9. Cash decreased $86.3 to $119.8.
- At September 30, total assets were $14,977.2, total liabilities $10,826.0, and shareholders’ equity $4,151.2. Equity declined from $4,563.4 at year-end 2020, including a $201.1 after-tax loss in other comprehensive income, primarily reflecting lower unrealized investment gains.
- Total investments were $10,422.3. Fixed maturities were $7,885.1, of which 94.9% were investment-grade.
- Long-term debt was $1,122.1, down from $1,172.8 at year-end; the company repaid its $50.0 term loan in March. It reported no borrowings under its $400.0 million credit facility. The $277.1 carrying value of 5.0% notes due in September 2022 is a near-term maturity to monitor.
- Insurance subsidiary FHLB funding agreements were $378.9, supported by $547.8 of pledged collateral. Kemper reported $330.6 of cash and investments held directly by the parent and direct non-insurance subsidiaries. It paid $60.8 in dividends and repurchased $161.7 of stock during the nine months; $171.6 remained authorized for repurchases.
Material changes and unusual items
- Earned premiums grew $436.4 for the nine months, primarily in Specialty P&C, reflecting the April acquisition of American Access Casualty (AAC), higher volume, and comparison with prior-period premium credits. AAC was acquired for approximately $370.9 cash consideration and contributed specialty auto business; the purchase accounting remained preliminary.
- Specialty P&C’s nine-month underlying loss and LAE ratio deteriorated to 84.0% from 70.3%. Kemper recorded $107.9 of adverse prior-year P&C reserve development, including $97.0 in specialty personal auto. Management attributed much of the specialty auto deterioration to higher claim frequency and severity, legal developments, and increased severity in Florida personal injury protection and other liability coverages.
- Net investment income increased $73.4 for the nine months, helped by alternative investments and company-owned life insurance, partly offset by lower fixed-income reinvestment yields. The income statement also included $92.4 of gains from changes in fair value of equity and convertible securities, compared with a $1.0 loss in 2020; this item was a $0.6 loss in Q3, versus a $45.2 gain in Q3 2020.
- Alternative energy partnership investments produced a $46.9 nine-month valuation loss, offset by $67.9 of related tax benefits, for stated net income attributable to those investments of $21.0. These investment and tax effects are significant to reported results and may vary.
- 2020 results included an $89.4 gain from partial satisfaction of the CSC judgment, which contributed to the year-over-year decline in other income and corporate results.
Outlook, risks and contingencies
The filing provides no quantified earnings or underwriting guidance. Management cautions that interim results are seasonal and should not be annualized. It expects insurance results to remain exposed to claim frequency and severity, catastrophe incidence, reserve-estimation uncertainty, inflation in repair and medical costs, litigation and social inflation, investment-market movements, and COVID-19 effects. The company also identifies regulatory, cybersecurity, competition, integration, and funding/liquidity risks. It continues a voluntary life-policy death-verification process; related regulatory initiatives and litigation create uncertainty about potential obligations. Management stated that reserve development could materially affect results in a given period, although it did not expect it to materially affect shareholders’ equity. The company reported no material change to its previously disclosed risk factors and no material change in market-risk disclosures.
Important facts for investors to verify
- Whether specialty auto claim frequency, severity, Florida PIP developments, and adverse reserve development continue to pressure loss ratios.
- Whether corrective underwriting, pricing, and profit-improvement actions can restore P&C combined ratios, especially in Specialty P&C.
- AAC’s post-acquisition contribution, final purchase-price allocation, integration costs, and realization of expected savings and synergies.
- The sustainability and volatility of alternative-investment income, equity fair-value gains, and alternative-energy tax benefits.
- Liquidity and capital priorities, including the 2022 notes maturity, FHLB collateral requirements, dividends, and remaining share-repurchase authorization.