Kemper Corporation (10-K) — FY2015
Business and reporting period: Kemper is a U.S. insurance holding company operating Property & Casualty (P&C) and Life & Health (L&H) segments. This filing covers the year ended December 31, 2015; quarterly figures below relate to the fourth quarter. The financial statements received an unqualified audit opinion. The internal-control assessment excluded Alliance United, acquired in April 2015.
Financial results and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $2,340.8 million | $2,196.6 million |
| Earned premiums | $2,009.6 million | $1,862.2 million |
| Net investment income | $302.6 million | $309.1 million |
| Income from continuing operations | $80.2 million | $112.6 million |
| Net income | $85.7 million | $114.5 million |
| Diluted net income per share | $1.65 | $2.12 |
| Net cash provided by operating activities | $215.0 million | $133.6 million |
| Total assets | $8,036.1 million | $7,833.4 million |
| Debt | $750.6 million | $752.1 million |
| Shareholders’ equity | $1,992.4 million | $2,090.7 million |
Fourth quarter: Revenue was $617.0 million, continuing-operations income was $1.3 million, and net income was $4.6 million, versus $559.7 million, $63.3 million, and $65.4 million, respectively, in Q4 2014. Q4 2015 included $14.7 million of investment impairment losses recognized in earnings.
- P&C: Segment net operating income was $26.7 million, compared with $24.9 million. Earned premiums rose to $1,415.2 million, substantially reflecting Alliance United. The combined ratio was 103.6% versus 103.7%; the underlying combined ratio was 100.0% versus 100.4%. Favorable prior-year reserve development fell to $12.9 million from $54.4 million. Catastrophe losses excluding reserve development declined to $64.5 million from $96.5 million.
- L&H: Segment net operating income declined to $71.7 million from $91.8 million. Earned premiums decreased to $594.4 million from $612.7 million. Management cited the absence of a $13.9 million after-tax investment dividend received in 2014, a $4.9 million after-tax premium-reserve correction in 2015, and higher life benefits.
- Investments and comprehensive income: Net realized investment gains increased to $52.1 million from $39.1 million, while impairment losses recognized in earnings rose to $27.2 million from $15.2 million. Other comprehensive income was a loss of $98.4 million, largely reflecting unrealized investment losses; total comprehensive income was a loss of $12.7 million.
- Liquidity and capital: Consolidated cash was $161.7 million, and Kemper directly held cash and investments of $341.2 million. The amended $225 million revolving credit facility had no borrowings outstanding at year-end. Insurance subsidiaries paid $285 million in dividends to Kemper during 2015; an estimated $168 million could be paid without prior regulatory approval in 2016. Operating cash flow improved, while investing activities used $28.6 million and financing activities used $100.8 million.
Material changes, outlook and risks
- Kemper acquired Alliance United, a California nonstandard auto insurer, for $71 million and contributed capital to support the business. Subsequent claims frequency and severity were higher than anticipated; Alliance United’s post-acquisition combined ratio was 109.7%. Kemper increased claims staffing, slowed new-business growth, pursued rate increases, and contributed a further $25 million in February 2016.
- Kemper issued $250 million of 4.35% senior notes due 2025 and redeemed $250 million of 6.00% notes due 2015. The early redemption generated a $9.1 million pretax loss. Of year-end debt, $360 million was scheduled to mature in 2017, $250 million in 2025, and $150 million in 2054.
- P&C abandoned a billing-system software project and recorded an $11.1 million pretax write-off in 2015, following a $54.6 million write-off of a separate policy-administration project in 2014. Management said new multi-year replacement-system projects are being undertaken and their costs are expected to be material; success and recoverability are uncertain.
- Major contingency: state initiatives, audits, and litigation may require life insurers to search death databases and change claims or escheatment practices, potentially retroactively. Kemper is challenging such requirements. The company could not reasonably estimate any resulting loss; potential effects include accelerated benefit payments, higher handling costs, and reputational harm.
- Other important risks include catastrophe losses and reinsurance availability or collectability; uncertain P&C claims reserves and pricing; investment-market and low-interest-rate exposure; insurance regulation and limits on subsidiary dividends; competition; and cybersecurity and critical-system disruption. Gross P&C reserves were $862.8 million at year-end, up from $733.9 million.
- The filing provides no quantified earnings or revenue guidance. Management’s outlook is subject to the forward-looking risks described in the filing. Kemper maintained a $0.24 quarterly dividend ($0.96 for the year) and had $247.5 million remaining under its share-repurchase authorization at year-end.
Investor verification priorities
- Track Alliance United rate actions, claims development, reserve adequacy, and additional capital needs.
- Review legal and regulatory developments on death-master-file matching and unclaimed life benefits, including any change to the currently unquantifiable exposure.
- Monitor P&C underlying loss trends, reserve development, catastrophe exposure, and reinsurance protection.
- Assess progress, expected cost, and implementation risk of the replacement billing and policy-administration systems.
- Verify debt refinancing plans for the 2017 maturity, subsidiary dividend capacity, and the sustainability of shareholder returns.
- Monitor investment impairments, portfolio valuation uncertainty, interest-rate sensitivity, and the resulting effect on earnings and equity.