Kemper Corporation — Q1 2016 Form 10-Q
Business context and period. This unaudited quarterly report covers the three months ended March 31, 2016, compared with Q1 2015. Kemper operates Property & Casualty Insurance and Life & Health Insurance businesses. Q1 2016 results include Alliance United, acquired April 30, 2015; its inclusion materially affects year-over-year comparisons.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenues | $611.3 million | $499.2 million |
| Earned premiums | $546.0 million | $431.3 million |
| Net investment income | $67.0 million | $70.6 million |
| Income (loss) from continuing operations | $(2.2) million; $(0.04) per share | $13.5 million; $0.26 per share |
| Net income (loss) | $(2.1) million | $13.5 million |
| Operating cash flow | $77.2 million | $29.0 million |
| Cash and investments | $6,742.7 million | At March 31, 2016; total investments were $6,582.3 million and cash was $160.4 million |
| Debt | $750.9 million | No revolver borrowings; $225 million facility expires June 2020 |
| Total shareholders’ equity | $2,041.1 million | $1,992.4 million at Dec. 31, 2015 |
| Total comprehensive income | $64.3 million | $51.1 million |
Premium growth was driven principally by Alliance United: P&C earned premiums rose $108.6 million, but excluding the acquisition declined $11.8 million. The Q1 net loss reflects, among other items, higher insurance losses and expenses and $9.3 million of net investment impairment losses. Net realized investment gains were $6.8 million. Unrealized investment gains boosted other comprehensive income by $66.4 million after tax.
Segment results and underwriting. P&C reported a $13.1 million net operating loss, versus $13.4 million income a year earlier. Its combined ratio was 108.8%, compared with 99.0%; underlying combined ratio was 98.8%, versus 97.9%. Life & Health net operating income increased to $20.3 million from $16.1 million, supported in part by higher investment income.
Q1 operating cash flow improved year over year, while investing activities used $63.0 million, including $111.7 million invested in short-term investments. Financing activities used $15.5 million, including $12.2 million of dividends and $3.8 million of share repurchases. Kemper directly held cash and investments of $295.7 million at quarter-end; insurance subsidiary dividends are subject to regulatory restrictions.
Material changes, outlook, risks and unusual items
- Alliance United: Its Q1 underlying loss ratio was 93.3%, with adverse reserve development of $6.5 million. Management cited higher claim frequency and severity than anticipated, inadequate rates, and claims-adjuster staffing constraints. Actions include adding adjusters, slowing new-business growth, agency management measures and rate increases.
- Catastrophes and reserves: P&C catastrophe losses and LAE were $37.5 million versus $10.3 million, primarily reflecting a late-March Texas hailstorm with estimated losses of $26.6 million. Prior-year P&C reserves developed adversely by $2.6 million overall; personal lines adverse development was partly offset by favorable commercial development.
- Investment performance and exposure: Alternative investment returns declined, reducing net investment income. Fixed maturities were 90% investment-grade. Management assessed reported unrealized investment losses as temporary; investment values remain exposed to interest-rate, equity-market and credit risks.
- Unclaimed-property proceedings: Multi-state initiatives and litigation could require life insurers to search for deceased insureds and accelerate benefit payments or escheatment. Outcomes and potential financial effects could not be reasonably estimated. The filing cites possible material effects on profitability, financial position and cash flows, as well as legal costs and reputational risk.
- Pension plan: A May 4, 2016 board action, after quarter-end, approved freezing benefit accruals for substantially all participants effective June 30, 2016. Kemper anticipated an approximately $1.0 million Q2 charge for remaining unamortized prior-service costs.
- Guidance: The filing provides no numerical earnings or revenue guidance. Management cautions that insurance seasonality, reserve estimates, catastrophes, investment markets, regulation and other uncertainties can make interim results unrepresentative.
Important facts for investors to verify
- Whether Alliance United’s claim trends, pricing, staffing and corrective actions improve, and how much further reserve development may emerge.
- The sustainability of P&C underwriting results, including catastrophe exposure, prior-year reserve development and the underlying combined ratio.
- Developments in unclaimed-property legislation, audits and litigation, including any changes to potential financial exposure or required claims practices.
- Investment portfolio performance, impairment charges, below-investment-grade exposure and the effect of market movements on earnings and equity.
- Cash available at the parent level, insurance-subsidiary dividend capacity, debt obligations and the effect of the pension-plan freeze.