Kemper(US:KMPR)2021-10-28 20:16PART I. FINANCIAL INFORMATION Financial Statements Kemper Corporation presents its unaudited condensed consolidated financial statements and notes for the periods ending September 30, 2021, and 2020 Condensed Consolidated Statements of Income The company shifted from net income to a net loss in Q3 and the first nine months of 2021, driven by increased policyholder benefits and incurred losses Key Income Statement Data (in millions, except per share) | Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $1,455.4 | $1,353.7 | $4,315.1 | $3,813.6 | | Total Expenses | $1,585.2 | $1,201.6 | $4,413.0 | $3,424.1 | | Income (Loss) before Income Taxes | $(129.8) | $152.1 | $(97.9) | $389.5 | | Net Income (Loss) | $(75.3) | $122.3 | $(14.7) | $312.4 | | Diluted EPS | $(1.18) | $1.83 | $(0.23) | $4.67 | Condensed Consolidated Balance Sheets Total assets increased to $14.98 billion, but growing liabilities reduced shareholders' equity to $4.15 billion Balance Sheet Summary (in millions) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Investments | $10,422.3 | $10,424.1 | | Goodwill | $1,312.0 | $1,114.0 | | Total Assets | $14,977.2 | $14,341.9 | | Total Insurance Reserves | $6,120.3 | $5,510.0 | | Total Liabilities | $10,826.0 | $9,778.5 | | Total Shareholders' Equity | $4,151.2 | $4,563.4 | Condensed Consolidated Statements of Cash Flows Operating cash flow increased to $307.6 million, while investing and financing activities resulted in net cash outflows Cash Flow Summary for Nine Months Ended Sep 30 (in millions) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $307.6 | $251.3 | | Net Cash Provided by (Used in) Investing Activities | $(99.0) | $(469.3) | | Net Cash (Used in) Provided by Financing Activities | $(294.9) | $433.4 | | Increase (Decrease) in Cash | $(86.3) | $215.4 | Note 3 - Acquisition of Business Kemper acquired AAC for $370.9 million, recognizing $198.0 million in goodwill from expected synergies - Kemper acquired American Access Casualty Company (AAC) on April 1, 2021, for a total cash consideration of approximately $370.9 million52 - The acquisition contributed $198.0 million to Goodwill, reflecting expected synergies from economies of scale and cost savings opportunities55 Note 5 - Property and Casualty Insurance Reserves Adverse development increased property and casualty insurance reserves by $107.9 million, mainly in specialty personal automobile insurance - For the nine months ended September 30, 2021, the company increased its property and casualty insurance reserves by $107.9 million due to adverse development from prior accident years66 - The adverse development was primarily driven by specialty personal automobile insurance ($97.0 million) and commercial automobile insurance ($8.3 million), both due to worse-than-expected loss patterns in liability coverage66 Management's Discussion and Analysis (MD&A) Management discusses Q3 2021 net loss due to lower operating income, detailing segment performance, investment results, liquidity, and capital resources Reconciliation of Net Income (Loss) to Adjusted Consolidated Net Operating Income (Loss) (in millions) | Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Income (Loss) | $(75.3) | $122.3 | $(14.7) | $312.4 | | Adjusted Consolidated Net Operating Income (Loss) | $(75.8) | $90.9 | $(88.0) | $333.0 | - The decrease in Net Income for the nine months of 2021 was primarily due to a $421.0 million decrease in Adjusted Consolidated Net Operating Income, driven by lower performance in the Specialty P&C and Life & Health segments176 Specialty Property & Casualty Insurance The Specialty P&C segment reported a net operating loss of $(70.9) million, driven by increased loss ratios and adverse reserve development despite premium growth Specialty P&C Performance (Nine Months Ended Sep 30) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Segment Net Operating Income (Loss) | $(70.9)M | $246.8M | | Earned Premiums | $2,916.2M | $2,452.9M | | Combined Ratio | 107.6% | 90.6% | | Underlying Combined Ratio | 103.5% | 89.6% | - The underlying loss ratio deteriorated by 13.7 points to 84.0% for the nine-month period, attributed to higher claim frequency and severity trends202 - Adverse prior-year reserve development was $105.3 million in the first nine months of 2021, compared to $16.9 million in 2020, largely driven by increased severity in personal injury protection in Florida202 Preferred Property & Casualty Insurance The Preferred P&C segment narrowed its net operating loss to $(5.1) million due to lower catastrophe losses, despite a deteriorated underlying combined ratio Preferred P&C Performance (Nine Months Ended Sep 30) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Segment Net Operating Income (Loss) | $(5.1)M | $(13.4)M | | Earned Premiums | $489.1M | $519.0M | | Combined Ratio | 113.6% | 108.2% | | Underlying Combined Ratio | 98.7% | 89.3% | - Catastrophe losses decreased to $71.6 million from $87.3 million year-over-year for the nine-month period, contributing to the reduced net operating loss230 Life & Health Insurance The Life & Health segment's net operating income decreased to $23.1 million, primarily due to increased policyholder benefits from higher mortality and claims frequency Life & Health Performance (Nine Months Ended Sep 30) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Segment Net Operating Income (Loss) | $23.1M | $50.6M | | Earned Premiums | $489.3M | $486.3M | | Policyholders' Benefits and Incurred Losses | $353.5M | $320.2M | | Insurance Expenses | $269.4M | $251.1M | - The increase in policyholder benefits was attributed to higher mortality in life insurance due to COVID-19, higher policy persistency, and higher accident and health claims257 Investment Results Net investment income increased to $318.9 million from alternative investments, but total comprehensive investment gains turned into a loss of $(128.2) million Net Investment Income (in millions) | Period | 2021 | 2020 | | :--- | :--- | :--- | | Nine Months Ended Sep 30 | $318.9 | $245.5 | | Three Months Ended Sep 30 | $101.9 | $92.1 | - The increase in net investment income was driven by higher valuations and distributions from Alternative Investments, which contributed $80.2 million in income for the nine months of 2021, compared to $4.6 million in 2020285 - The fixed maturity portfolio was 94.9% investment-grade as of September 30, 2021292 Liquidity and Capital Resources Kemper held $330.6 million in cash and investments, maintained a $400.0 million credit facility, and repurchased $161.7 million of common stock - Kemper (parent company) held cash and investments of $330.6 million at September 30, 2021, down from $733.2 million at year-end 2020328 - Total long-term debt outstanding was $1.12 billion as of September 30, 2021. The company repaid a $50.0 million term loan in March 2021315316 - The company repurchased $161.7 million of common stock in the first nine months of 2021. As of September 30, 2021, $171.6 million remained under the share repurchase authorization323324 Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to the company's market risk disclosures from its 2020 Annual Report - There have been no material changes to the Company's disclosures about market risk from the 2020 Annual Report338 Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures are effective339 - No material changes to internal control over financial reporting occurred during the fiscal quarter340 PART II. OTHER INFORMATION Legal Proceedings The company is involved in legal proceedings, including regulatory initiatives requiring proactive death verification for life insurers, with uncertain ultimate outcomes - The company is subject to initiatives requiring life insurers to proactively use death verification databases to identify deceased insureds, which could alter the terms of existing contracts166 - Kemper voluntarily began implementing a comprehensive death verification process in 2016. The ultimate financial impact of these industry-wide initiatives remains uncertain167168 Risk Factors The company refers readers to its 2020 Annual Report on Form 10-K for significant risk factors and other SEC filing disclosures - For a discussion of significant risk factors, the report refers to Item 1A of the 2020 Annual Report on Form 10-K343 Unregistered Sales of Equity Securities and Use of Proceeds Kemper repurchased approximately 40,000 shares for $3.0 million in Q3 2021, with $171.6 million remaining under authorization Share Repurchases (Q3 2021) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Maximum Dollar Value that May Yet Be Purchased (in millions) | | :--- | :--- | :--- | :--- | | July 2021 | 40,123 | $74.79 | $171.6 | | August 2021 | — | — | $171.6 | | September 2021 | — | — | $171.6 | Exhibits This section indexes exhibits filed with the Form 10-Q, including certifications and XBRL data files