Kemper Corporation — Q3 2015 Form 10-Q
Business context and reporting period
Kemper is an insurance holding company operating Property & Casualty (P&C) and Life & Health segments. This unaudited quarterly report covers the three and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Dollars are in millions except per-share data.
Financial performance and position
- Revenue: Q3 total revenues were $615.4, up 14% from $539.8; nine-month revenues were $1,723.8, up 5% from $1,636.9. Earned premiums were $536.7 in Q3 and $1,468.1 for nine months.
- Profit: Q3 net income was $37.9, or $0.73 per diluted unrestricted share, versus $4.7, or $0.09, a year earlier. Nine-month net income was $81.1, or $1.56 per share, versus $49.1, or $0.90. Continuing-operations income was $38.0 for Q3 and $78.9 for nine months. Consolidated net operating income, a non-GAAP measure, was $36.6 for Q3 and $65.1 for nine months.
- Segments and underwriting: Q3 P&C net operating income was $21.0, versus a $13.6 loss; its combined ratio improved to 98.2% from 113.7%, and underlying combined ratio to 97.7% from 112.5%. Nine-month P&C income was $31.8 versus a $0.4 loss, with combined ratio of 101.8% versus 106.9%. Life & Health net operating income was $23.5 in Q3 versus $20.3, but $53.9 for nine months versus $58.3.
- Investment results and comprehensive income: Net investment income was $75.9 for Q3 and $223.2 for nine months, up from $72.3 and $216.0. Nine-month realized investment gains were $42.7 versus $18.1; impairment losses were $12.5 versus $8.7. Nine-month other comprehensive loss of $73.7, largely from unrealized investment value changes, reduced total comprehensive income to $7.4.
- Cash flow and liquidity: Nine-month operating cash flow was $167.6 versus $99.4; investing used $9.6 and financing used $87.0. Cash increased to $147.1 from $76.1 at year-end. Kemper directly held $343.3 of cash and investments at September 30. The $225 undrawn revolving credit facility was extended to June 2020.
- Balance sheet and debt: Total investments were $6,473.0; total assets $8,075.6; insurance reserves $4,180.7; debt at amortized cost $750.4; and shareholders’ equity $2,024.6. Equity was $2,090.7 at December 31, 2014.
Material changes versus prior comparable periods
- Alliance United, acquired April 30 for $71.0, contributed $161.7 of earned premiums from acquisition through September 30. Kemper also contributed $75.0 to support the acquired business. Excluding the acquisition, P&C earned premiums declined year over year.
- P&C results benefited from lower catastrophe losses and lower software write-offs than in 2014. The company recorded an $11.1 software write-off in 2015, compared with $54.6 in Q3 2014. Q3 2015 P&C underlying loss ratio nevertheless worsened, including deterioration in personal and commercial auto experience.
- In February 2015, Kemper issued $250.0 of 4.35% senior notes due 2025 and redeemed $250.0 of 6.00% notes due 2015, recording a $9.1 pretax early-extinguishment loss. Nine-month debt issuance and repayments were $288.8 and $300.3, respectively.
- During the first nine months, Kemper repurchased 1.2 million shares for $41.3 and paid $0.72 per share in dividends. Insurance subsidiaries paid $235.0 in dividends to Kemper, including a $192 extraordinary dividend from Trinity.
Outlook, risks and unusual items
- The filing provides no formal earnings or revenue guidance. Management expected to contribute approximately $30 million of additional capital to Alliance United in Q4, primarily to support growth and statutory-capital needs; the acquired business was not expected to pay a dividend in 2015.
- Management cited insurance loss-reserve estimates, investment valuations, pension obligations and goodwill recoverability as areas sensitive to assumptions. P&C reserves developed favorably by $16.3 for the first nine months, less than the $44.9 favorable development in 2014; actual development may differ.
- A significant, unresolved risk concerns state efforts to require life insurers to search death records and potentially accelerate payment or escheatment of benefits on existing policies. Kemper is challenging various laws, audits and regulatory demands. Outcomes and potential losses cannot be reasonably estimated; adverse outcomes could increase claims costs and materially affect profitability, financial position and cash flows. The Maryland appeal was denied in October 2015; further review was planned. Other litigation and examinations remained pending.
- Investment-market exposure is material: the company estimated that an instantaneous 100-basis-point rate increase would reduce fixed-maturity values by $311.1, while a 30% equity-market decline would reduce equity-security values by $129.9 and fair-value-option investments by $8.4. These are sensitivity scenarios, not forecasts.
- Other notable items include $31.4 of gains on equity-security sales associated with portfolio allocation and tax-planning actions, and a $2.3 tax benefit related to the effective settlement of certain tax years.
Important facts for investors to verify
- Whether P&C auto loss trends, particularly underlying claims frequency and severity, improve and whether Alliance United achieves sustainable underwriting results.
- Future development of loss reserves, including the extent to which prior-year favorable development supports reported earnings.
- Alliance United’s additional capital requirements, integration progress and indemnification recoveries.
- Developments in unclaimed-property litigation and regulation, including potential retrospective application and effects on benefit payments and cash flows.
- Investment portfolio valuation, realized gains and losses, unrealized changes in equity, and exposure to interest-rate and equity-market movements.