Kemper (NYSE:KMPR) reported a second-quarter net loss of $464.8 million, or $7.90 per share, as a $460 million non-cash goodwill impairment in its specialty auto segment weighed on GAAP results. Adjusted consolidated net operating income was $26.3 million, or $0.45 per share, as the insurer cited sequential improvement in underlying operating performance.
President and Chief Executive Officer Steve McAnena, who joined the company two months ago, said restoring profitability is Kemper’s primary priority, with growth to be pursued only where it can be achieved profitably.
The company said its underlying operating performance improved through property and casualty underwriting results, expense discipline and stable earnings from its life insurance business. Net investment income totaled $105 million during the quarter, while trailing 12-month cash flow was $434 million.
Goodwill Impairment Drives Reported Loss
Chief Financial Officer Brad Camden said the goodwill impairment was triggered by recent operational challenges and a subsequent decline in Kemper’s share price, requiring a quantitative assessment under GAAP. The charge was based in part on the company’s second-quarter share price and reduced goodwill in the Specialty Property & Casualty segment to about $570 million.
Camden said the impairment does not affect the company’s ongoing operations, cash-generating ability, statutory capital, holding-company liquidity or compliance with debt and revolving credit covenants.
Kemper also recorded a $16.6 million after-tax allowance for credit losses associated with surplus notes issued by Kemper Reciprocal Exchange. Camden said during the question-and-answer session that the company took a $21 million pre-tax charge on $36 million of surplus notes after concluding that projected cash flows at the exchange could not support their prior valuation. Roughly $15 million of surplus notes remain and will be evaluated based on the legal entity’s future cash flows.
McAnena said the company is reviewing its strategy for the reciprocal exchange and expects to provide further details at a later time.
Kemper ended the quarter with $766 million of holding-company liquidity. Its debt-to-capital ratio rose to 28.3%, which Camden attributed primarily to the goodwill impairment rather than a change in liquidity or statutory capital.
Personal Auto Improvement, California Actions Continue
Kemper’s specialty auto segment, which includes personal and commercial auto operations, reported a normalized underlying combined ratio of 102%, improving 0.8 percentage points sequentially.
In personal auto, the normalized underlying combined ratio improved 1.3 points sequentially to 105.2%, reflecting stronger underwriting performance and expense discipline. However, McAnena said the business remains below target return levels, largely because of Kemper’s exposure to California.
The company reduced California’s share of its personal auto portfolio by 2.5 percentage points during the quarter. Policies in force in California declined 10% sequentially, while Kemper continued to grow in other markets.
Management said it implemented rate increases averaging about 5.5% across two California programs that began taking effect during the second quarter and has filed for an additional 6.9% increase. McAnena said Kemper needs rate increases in the double-digit range to restore profitability in the state, alongside non-rate measures and cost reductions.
The company has slowed new-business writings in areas where management expects new policies could hurt calendar-year results. McAnena said Kemper will not provide a timetable for returning to policy growth in California, instead tying growth plans to profitability or a clear path toward it.
Camden said the personal auto combined ratio in California declined from the first quarter to the second quarter despite normal seasonal pressure, which he described as an encouraging sign that the company’s rate and non-rate actions are having the intended effect.
Commercial Auto Growth to Be More Disciplined
Commercial auto posted an underlying combined ratio of 93.7%, while policies in force increased 9.2% from a year earlier. Reported results were affected by $17.7 million of prior-year reserve development.
McAnena said Kemper will take additional rate and tighten underwriting standards in commercial auto, even if those actions reduce near-term growth. The company has seen adverse prior-year development in successive quarters, prompting management to adopt what McAnena described as a more measured approach.
Camden said commercial auto has roughly $1 billion in reserves, with about 90% related to bodily injury coverage. He said California represents about 45% of the commercial auto book and remains a particular challenge because of litigation activity and higher claim-defense costs.
Management said it believes it has a handle on reserving trends but will continue to monitor bodily injury claims, especially in California.
Life Business and Cost Savings
Kemper’s life business generated $18 million in net operating income, supported by earned-premium growth, favorable mortality and lapse experience, and higher investment income. Earned premiums increased to $103 million, while average premium per policy rose 5.4% from the prior-year period.
The company said its restructuring program has identified more than $80 million in cumulative annualized run-rate savings since it was announced in October, up $20 million from the prior quarter. Camden said the cost actions have contributed to lower expense and loss-adjustment-expense ratios.
McAnena also said Kemper has realigned its property and casualty organization, placing underwriting, pricing, product and claims under one leader, Eric Kappler. The company expects the change to improve accountability, speed decision-making and strengthen execution.
About Kemper (NYSE:KMPR)
Kemper Corporation (NYSE:KMPR) is a diversified insurance holding company headquartered in Chicago, Illinois. Formed through the rebranding of Unitrin in 2010, Kemper has established a nationwide presence by offering a broad array of property and casualty insurance products. The company distributes its products through independent agents, brokers and direct-to-consumer channels, serving both individual policyholders and commercial clients.
The personal insurance segment provides coverage for automobiles, homeowners, renters and umbrella lines, while the commercial business focuses on liability, workers’ compensation and specialty property solutions tailored to small and mid-sized enterprises.
