Kemper Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results; annual comparisons below are primarily against 2016. Kemper is a U.S. insurance holding company with Property & Casualty (P&C) and Life & Health (L&H) segments.
Financial performance
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $2,723.4 million | $2,521.9 million |
| Earned premiums | $2,350.0 million | $2,220.0 million |
| Net investment income | $327.2 million | $298.3 million |
| Income from continuing operations | $119.9 million; $2.31 diluted per share | $12.7 million; $0.25 diluted per share |
| Net income | $120.9 million; $2.33 diluted per share | $16.8 million; $0.33 diluted per share |
| Net cash provided by operations | $240.6 million | $240.5 million |
| Long-term debt, net | $592.3 million | $751.6 million |
| Total assets / shareholders’ equity | $8,376.2 million / $2,115.6 million | $8,210.5 million / $1,975.2 million |
Fourth-quarter 2017 revenue was $697.3 million and net income was $36.9 million, compared with $642.7 million and $31.2 million, respectively, in fourth-quarter 2016. Fourth-quarter 2017 diluted net income per share was $0.71.
Consolidated net income increased $104.1 million year over year. Consolidated net operating income, a non-GAAP measure, rose to $92.5 million from $12.4 million. The improvement reflected stronger L&H results, better underlying P&C losses and expenses, higher investment income and realized gains, and lower impairment losses. Net realized investment gains were $56.5 million versus $33.1 million; impairment losses recognized in earnings declined to $14.3 million from $32.7 million.
Segment and underwriting results
- P&C: Segment net operating income was $7.8 million, versus a $2.9 million loss. Earned premiums increased to $1,736.0 million. The combined ratio was 105.6% in both years, while the underlying combined ratio improved to 94.2% from 99.7%. Catastrophe losses, excluding prior-year reserve development, rose to $179.0 million from $109.6 million, substantially reflecting California wildfires and other severe events. Prior-year P&C reserve development was adverse by $19.5 million, versus favorable development of $14.3 million in 2016.
- L&H: Segment net operating income increased to $90.8 million from $30.3 million. Earned premiums were $614.0 million, up from $605.2 million. The comparison benefited from a $77.8 million pre-tax charge in 2016 related to expanded use of death verification databases; excluding that initial charge, L&H benefits and incurred losses increased modestly in 2017.
Overall insurance reserves were $4,537.8 million at year-end, including $1,016.8 million of P&C reserves, up from $931.4 million. Management describes reserve estimation as inherently uncertain; a disclosed sensitivity analysis estimated a possible $79.5 million variation in personal-auto reserves under a one-standard-deviation scenario.
Liquidity, capital and shareholder returns
- Year-end cash was $45.7 million; Kemper directly held cash and investments of $197.3 million, down from $298.7 million. These are distinct measures.
- The $225 million unsecured revolving credit facility had no year-end borrowings and was fully available. Insurance subsidiaries had statutory capital above regulatory minimums, and the company estimated they could pay $201 million of dividends to the parent in 2018 without prior regulatory approval.
- Kemper issued $200 million of additional 4.35% senior notes due 2025 and repaid $360 million of debt during 2017. Debt net of issuance costs was $592.3 million at year-end. Operating cash flow was nearly unchanged year over year; financing activities used $205.2 million.
- The company paid $0.96 per share in dividends for the year and made no open-market share repurchases in 2017. The remaining authorization under its repurchase program was $243.7 million.
Outlook, material events and risks
- Proposed Infinity acquisition: Announced February 13, 2018, after year-end. Kemper agreed to acquire Infinity in a cash-and-stock transaction valued at approximately $1.4 billion under the stated transaction terms. Closing was expected in the third quarter of 2018, subject to shareholder and regulatory approvals and other conditions. Kemper anticipated funding the cash portion with cash on hand and internal resources, while noting it might explore a term loan to optimize liquidity. It expected the deal to be accretive to earnings per share in the first year, excluding nonrecurring costs, but cautioned that this estimate could change. The transaction was expected to issue about 13.2 million Kemper shares, with Infinity shareholders owning approximately 20% of the combined company.
- Catastrophe exposure: 2017 catastrophe losses increased materially, and future severity, reinsurance availability and recoveries are uncertain. P&C business is concentrated geographically: California represented 55% of segment premiums in 2017.
- Death verification claims: Kemper expected to pay approximately $80 million in life claims over several years as it completed its outreach process. Related regulatory initiatives, audits and litigation could affect obligations and costs; ultimate outcomes are uncertain.
- Tax reform: The December 2017 Tax Act reduced the federal corporate rate to 21% effective 2018. Kemper recorded provisional tax effects, including a $10.5 million reduction in its net deferred tax liability and a $7.4 million tax benefit in 2017; it expected to finalize its analysis in 2018. It also recorded $3.1 million of current tax expense on previously untaxed pre-1984 income.
- Unrecognized legal award: An arbitrator awarded Kemper’s subsidiary $84.3 million in damages, 9% prejudgment interest and $7.2 million in costs against CSC/DXC in 2017. Confirmation and vacatur litigation remained pending; the award was treated as a gain contingency and was not recorded in the financial statements.
- Other key exposures include reserve adequacy, investment-market and interest-rate changes, regulatory constraints on rates and subsidiary dividends, competition, cyber and systems risks, and integration costs or failure to realize acquisition benefits. No specific ongoing earnings guidance was provided in the supplied filing text.
The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Track P&C underlying loss trends against catastrophe costs and adverse prior-year reserve development, especially in personal auto and homeowners.
- Assess whether L&H earnings remain strong after the nonrecurring 2016 death-database charge, and monitor the cash cost and completion of the expected claims outreach.
- Verify the final Tax Act accounting and its effects on reported earnings, deferred taxes and investment returns.
- Review Infinity closing conditions, financing, share issuance, integration costs and realized synergies against management’s accretion expectation.
- Monitor parent-company liquidity and the timing or regulatory limits on insurance-subsidiary dividends, alongside debt service and shareholder distributions.
- Follow the DXC arbitration award litigation and collection prospects; no gain had been recognized at the reporting date.