Kemper Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Kemper operates Property & Casualty Insurance and Life & Health Insurance businesses. The company realigned its P&C operations into one segment in Q1 2014 and reclassified certain prior-period segment results.
Financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $539.8 million | $635.7 million | $1,636.9 million | $1,840.5 million |
| Net income | $4.7 million | $70.1 million | $49.1 million | $162.5 million |
| Continuing-operations income | $4.8 million | $68.6 million | $49.3 million | $159.7 million |
| Diluted net income per unrestricted share | $0.09 | $1.23 | $0.90 | $2.81 |
Revenue and earnings comparisons were affected by lower earned premiums, lower investment income and materially lower realized investment gains than in 2013. The 2013 comparison included a $43.6 million gain from selling the corporate-office building. In 2014, Kemper recorded a $54.6 million pretax write-off of P&C software.
- Premiums and investment income: Nine-month earned premiums were $1,410.7 million, down $119.5 million year over year; net investment income was $216.0 million, down $21.8 million. Net realized investment gains were $18.1 million versus $78.3 million.
- P&C underwriting: Nine-month segment net operating loss was $0.4 million, compared with income of $71.5 million. The reported combined ratio was 106.9% for the nine months and 113.7% for Q3. Catastrophe losses excluding prior-year development rose to $92.1 million for the nine months from $45.0 million. The software write-off contributed 5.8 percentage points to the nine-month combined ratio and 17.6 points to Q3. Underlying losses improved, but lower premiums increased expense ratios.
- Life & Health: Segment net operating income was $58.3 million for the nine months, down from $64.4 million. Lower premiums and investment income were partly offset by lower benefits and expenses.
- Cash flow: Operating cash flow was $99.4 million for the nine months, versus $92.9 million. Investing activities used $72.3 million; financing activities used $0.5 million. Cash increased $26.6 million to $93.1 million.
Balance sheet, debt and liquidity
At September 30, 2014, total assets were $7,905.3 million, total liabilities $5,800.8 million, and shareholders’ equity $2,104.5 million. Total investments were $6,398.7 million. Insurance reserves totaled $4,041.7 million.
Debt at amortized cost was $751.9 million, up from $606.9 million at year-end 2013, primarily reflecting the February issuance of $150 million of 7.375% subordinated debentures due 2054. The $225 million revolving credit facility had no borrowings outstanding. Kemper reported $302.4 million of cash and investments directly held by the parent. Insurance subsidiaries had paid $154 million in dividends to Kemper during the first nine months; management estimated another $63 million could be paid without prior regulatory approval during the remainder of 2014 and expected at least $25 million.
Kemper repurchased 3.0 million shares for $106.5 million during the first nine months and authorized a new $300 million repurchase program in August. Quarterly dividends were $0.24 per share.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management cautions that interim results are affected by seasonality, market conditions and estimates.
- The most significant unusual charge was the $54.6 million software write-off: management concluded it was no longer probable that the software would be completed or fully implemented after the vendor signaled changes in product strategy.
- Life subsidiaries face state initiatives, audits and litigation over whether insurers must proactively search death databases and potentially apply new requirements retroactively to existing policies. The company said the possible loss could not be reasonably estimated; adverse outcomes could accelerate benefit payments or escheatment, raise claims-handling costs and materially affect profitability, financial position and cash flows.
- Insurance results remain exposed to catastrophe frequency and severity, reserve-estimate changes, premium-volume declines and investment performance. The filing also identifies interest-rate and equity-price risk; a modeled 100-basis-point rate increase reduced fixed-maturity fair value by $315.5 million, and a modeled 30% equity-market decline reduced equity-security fair value by $153.7 million.
- Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the P&C software impairment is complete or could lead to further costs, and how replacement plans affect operations.
- Subsequent catastrophe losses, reserve development and the sustainability of improved underlying loss ratios amid lower P&C premiums.
- Developments in death-master-file laws, multistate examinations and related litigation, including any potential financial or liquidity effects.
- Whether investment income, realized gains and portfolio valuations recover or weaken further, and how debt costs and share repurchases affect capital and liquidity.