Kemper(KMPR) - 2018 Q4 - Annual Report

Part I Business Kemper is a diversified insurance holding company that expanded its Specialty P&C segment through the $1.5 billion acquisition of Infinity - On July 2, 2018, Kemper acquired Infinity Property and Casualty Corporation for approximately $1.5 billion, a key strategic move to expand its specialty insurance business[32] - The company operates through three primary segments: Preferred Property & Casualty Insurance, Specialty Property & Casualty Insurance, and Life & Health Insurance[33] Employee Distribution by Segment | Segment | Number of Employees | | :--- | :--- | | Preferred Property & Casualty | ~1,300 | | Specialty Property & Casualty | ~2,600 | | Life & Health Insurance | ~3,300 | | Corporate & Other | Remainder of 8,100 total | Property and Casualty Insurance Business The P&C business operates through Preferred and Specialty segments, managing catastrophe risk via diversification and reinsurance - The P&C business provides automobile, homeowners, and other personal and commercial insurance through two main segments: Preferred and Specialty[36][38] - The company manages catastrophe risk through geographic diversification, underwriting restrictions, and a comprehensive reinsurance program covering events up to $275 million in excess of a $50 million retention[50][51][59] P&C Insurance Segment Premium Contribution (2018) | Segment | % of Consolidated Premiums | | :--- | :--- | | Preferred P&C | 22% | | Specialty P&C | 60% | Property and Casualty Insurance Reserves by Segment (2018 vs 2017) | Business Segment | 2018 ($M) | 2017 ($M) | | :--- | :--- | :--- | | Preferred Property & Casualty | $452.9 | $461.9 | | Specialty Property & Casualty | $1,387.0 | $514.4 | | Life & Health Insurance | $4.4 | $4.1 | | Total Business Segments | $1,844.3 | $980.4 | Life and Health Insurance Business This segment provides individual life and supplemental health products through a network of career and independent agents - The Life & Health segment focuses on individual life and supplemental accident and health products, primarily for customers with modest incomes[72][75][76] - Earned premiums from life insurance accounted for 11% of the company's consolidated insurance premiums in 2018, down from 16% in 2017[72] - The lapse ratio for individual life insurance has remained stable at 6% for 2018, 2017, and 2016[81] Investments The company pursues a total return investment strategy focused on yield and liquidity to meet its insurance obligations - The company employs a total return investment strategy with an emphasis on yield, while maintaining liquidity to meet insurance obligations[88] Regulation The company's insurance operations are subject to extensive state and federal regulations governing solvency, rates, and market conduct - Kemper's insurance subsidiaries are subject to extensive state-level regulation covering policy forms, rates, licensing, market conduct, investments, solvency, and dividend payments[90][93] - As a holding company, Kemper relies on dividends from its insurance subsidiaries to meet its obligations, which are subject to regulatory restrictions[97] - The company is also subject to federal regulations, including the Dodd-Frank Act, the Affordable Care Act, and HIPAA, which impact financial services, health insurance, and data privacy[101][103][105] Risk Factors The company faces significant risks from regulation, catastrophe losses, reserve estimation uncertainty, and investment volatility - The evolving legal and regulatory landscape could increase operating costs and limit growth[108][109] - Catastrophe losses from events like hurricanes and wildfires are unpredictable and could materially affect results, liquidity, and financial condition[116] - Estimating property and casualty loss reserves is complex and inherently uncertain; inadequate reserves could materially impact operating results[122][123] - A downgrade in financial strength ratings below 'A-' could result in a substantial loss of business[125] - The investment portfolio is exposed to interest rate, equity price, and liquidity risks, which can impact investment income and cause realized/unrealized losses[135] - As a holding company, Kemper's ability to service debt and pay dividends depends on receiving sufficient dividends from its regulated insurance subsidiaries[146] Properties Kemper owns eleven buildings and leases numerous other facilities for its corporate and operational needs across the country - The company owns eleven buildings totaling approximately 400,000 square feet[153] - Leased facilities include the corporate headquarters in Chicago (~65,000 sq ft), P&C operations (~490,000 sq ft), and Life & Health operations (~450,000 sq ft)[155] Legal Proceedings Information regarding pending legal proceedings is incorporated by reference from the Consolidated Financial Statements - Details on legal proceedings are found in Note 23 of the financial statements[157] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on the NYSE, with consistent quarterly dividends paid and significant capacity remaining under its share repurchase program - The Board of Directors authorized a $300.0 million share repurchase program, with $243.7 million remaining available as of December 31, 2018[164] Quarterly Dividends Paid Per Share | Year | Q1 | Q2 | Q3 | Q4 | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | 2018 | $0.24 | $0.24 | $0.24 | $0.24 | $0.96 | | 2017 | $0.24 | $0.24 | $0.24 | $0.24 | $0.96 | Selected Financial Data Financial performance grew significantly in 2018, driven by the Infinity acquisition, with substantial increases in revenues, net income, and total assets Selected Financial Data (2016-2018) | Metric ($ in Millions, except per share) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total Revenues | $3,725.1 | $2,723.4 | $2,521.9 | | Net Income | $190.1 | $120.9 | $16.8 | | Net Income Per Share (Diluted) | $3.22 | $2.33 | $0.33 | | Total Assets | $11,544.9 | $8,376.2 | $8,210.5 | | Shareholders' Equity | $3,050.1 | $2,115.6 | $1,975.2 | | Book Value Per Share | $47.10 | $41.11 | $38.52 | Management's Discussion and Analysis of Financial Condition and Results of Operations Net income increased in 2018 due to improved P&C segment performance and the Infinity acquisition, supported by strong liquidity - The increase in 2018 net income was primarily due to a $71.1 million improvement in the Preferred P&C segment and a $59.5 million increase in the Specialty P&C segment[179][180] - Earned premiums surged by $1,034.4 million in 2018, primarily driven by growth in the Specialty P&C segment following the acquisition of Infinity[183] Net Income and Adjusted Consolidated Net Operating Income (2017 vs 2018) | Metric ($ in Millions) | 2018 | 2017 | | :--- | :--- | :--- | | Net Income | $190.1 | $120.9 | | Income from Continuing Operations | $188.4 | $119.9 | | Adjusted Consolidated Net Operating Income | $258.4 | $92.5 | Preferred Property & Casualty Insurance The segment's performance improved significantly due to a sharp reduction in catastrophe losses and favorable reserve development - The segment's significant improvement in 2018 was driven by an $86.2 million decrease in catastrophe losses and LAE[212][215] - The segment experienced favorable loss and LAE reserve development of $8.3 million in 2018, a significant turnaround from the $15.7 million of adverse development in 2017[215] Preferred P&C Segment Performance (2017 vs 2018) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Segment Net Operating Income (Loss) ($M) | $25.7 | $(45.4) | | Combined Ratio | 104.6% | 118.7% | | Underlying Combined Ratio | 93.8% | 92.7% | | Catastrophe Losses and LAE ($M) | $87.3 | $173.5 | Specialty Property & Casualty Insurance The Infinity acquisition drove substantial growth in earned premiums and improved the underlying loss ratio - The acquisition of Infinity was the primary driver of growth, contributing $758.1 million to the increase in earned premiums for 2018[240][242] - The underlying loss and LAE ratio improved by 3.8 percentage points in 2018, driven by the inclusion of Infinity's lower-loss-ratio business[244] Specialty P&C Segment Performance (2017 vs 2018) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Segment Net Operating Income ($M) | $115.8 | $56.3 | | Earned Premiums ($M) | $2,027.4 | $1,005.7 | | Combined Ratio | 96.0% | 96.0% | | Underlying Combined Ratio | 95.7% | 95.1% | Life & Health Insurance Segment net operating income remained stable as lower income tax expense offset higher benefits and lower investment income - Segment net operating income remained stable, decreasing by only $0.4 million in 2018, as lower income tax expense offset other pressures[181][269] - In 2016, this segment took a pre-tax charge of $77.8 million related to death verification databases, which significantly impacted year-over-year comparisons with 2017[265] Life & Health Segment Performance (2017 vs 2018) | Metric ($ in Millions) | 2018 | 2017 | | :--- | :--- | :--- | | Segment Net Operating Income | $91.5 | $91.9 | | Total Earned Premiums | $626.3 | $614.0 | | Net Investment Income | $210.9 | $223.2 | Liquidity and Capital Resources The company utilized new credit facilities and cash to fund the Infinity acquisition and maintains significant dividend capacity from its subsidiaries - To facilitate the Infinity acquisition, the company increased its credit facility to $300.0 million and added a $250.0 million term loan[331] - The Infinity acquisition was funded with $564.6 million in cash and the issuance of 13.2 million shares of Kemper stock[340] - In 2019, Kemper's direct insurance subsidiaries are estimated to be able to pay $351 million in dividends to the parent holding company without prior regulatory approval[338] Critical Accounting Estimates Key estimates involve valuing investments, P&C reserves, goodwill, and pension obligations, with P&C reserves being inherently uncertain - Key critical accounting estimates include the valuation of investments, estimation of property and casualty insurance reserves, and assessment of goodwill recoverability[358] - The process of estimating P&C reserves is inherently uncertain; at year-end 2018, gross P&C reserves stood at $1,874.9 million[368][369][371] - Goodwill is tested for impairment annually; qualitative assessments in 2018 indicated that the fair value of each unit significantly exceeded its carrying value[382] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate and equity price changes, with significant potential fair value impact from adverse movements Market Risk Sensitivity Analysis (as of Dec 31, 2018) | Financial Instrument | Fair Value ($M) | Pro Forma Decrease from 100bp Rate Rise ($M) | Pro Forma Decrease from 30% Equity Price Drop ($M) | | :--- | :--- | :--- | :--- | | Investments in Fixed Maturities | $6,424.2 | $(393.5) | — | | Investments in Equity Securities | $684.4 | $(7.4) | $(175.6) | Financial Statements and Supplementary Data This section contains the audited consolidated financial statements and supplementary data for the fiscal year ended December 31, 2018 Consolidated Statement of Income Highlights (2018) | Metric | Amount ($M) | | :--- | :--- | | Total Revenues | $3,725.1 | | Total Expenses | $3,526.0 | | Income from Continuing Operations | $188.4 | | Net Income | $190.1 | | Diluted EPS | $3.22 | Consolidated Balance Sheet Highlights (as of Dec 31, 2018) | Metric | Amount ($M) | | :--- | :--- | | Total Investments | $8,069.5 | | Total Assets | $11,544.9 | | Total Insurance Reserves | $5,433.6 | | Total Liabilities | $8,494.8 | | Total Shareholders' Equity | $3,050.1 | Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of year-end 2018 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year[693] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework[696] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2019 Proxy Statement - Required information is incorporated by reference from the 2019 Proxy Statement[702] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the 2019 Proxy Statement - Required information is incorporated by reference from the 2019 Proxy Statement[704] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the 2019 Proxy Statement - Required information is incorporated by reference from the 2019 Proxy Statement[705] Certain Relationships and Related Transactions, and Director Independence Information regarding related person transactions and director independence is incorporated by reference from the 2019 Proxy Statement - Required information is incorporated by reference from the 2019 Proxy Statement[710] Principal Accounting Fees and Services Information concerning principal accounting fees and services is incorporated by reference from the 2019 Proxy Statement - Required information is incorporated by reference from the 2019 Proxy Statement[711] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K report - This section includes the consolidated financial statements, four financial statement schedules, and an index of all exhibits filed with the report[713][714][715]