Kemper Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Kemper Corporation is a specialty insurance provider that mainly focuses on providing auto, life, and health insurance, particularly to underserved markets, utilizing a network of independent agents and brokers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Kemper Corporation’s business primarily revolves around providing insurance products, with a focus on the specialty market, and their target audience is the underserved population.

Business Overview

Kemper operates primarily within the insurance sector, focusing on non-standard personal lines, life, health, and specialty segments. This means that Kemper’s client base is not the typical or the most profitable ones for big insurers.

  • Property & Casualty Insurance: This segment, encompassing auto insurance and home insurance, is the largest driver of revenues. This line of business has also been the main contributor of losses, which is not surprising since many of their customers may be high-risk drivers or live in low-income areas which are prone to higher losses.

    • Auto insurance is further divided into non-standard and preferred segments. Non-standard auto insurance focuses on drivers with less-than-perfect driving records who would be hard-pressed to find cheap insurance from other big players.

  • Life and Health Insurance: This includes whole and term life insurance, as well as a variety of health insurance products. The sales of life insurance, like any financial product, often rely heavily on agents and brokers.

Kemper serves a diverse client base within its chosen markets. Some customers are likely to be attracted by their flexible or accessible solutions, and others may prefer to be insured with a small-company rather than being a number in one of the insurance giants.

Industry Trends & Competitive Landscape 

*   The insurance industry, especially the specialty sector, is a highly fragmented and competitive market. Major players such as Allstate and Progressive also compete in this market, but usually at higher premiums. This makes the market dynamic and challenging. 
*   The market is also becoming more consolidated, which has forced companies to grow through acquisitions, which is a strategy that Kemper has also followed.
 *  Technology is also disrupting the industry, creating new methods for pricing, analyzing risk, and also for customer acquisition. There are also new insurance companies that are purely online.
 *  The rise of self-funded plans has also led to fewer individual customers.
 *  A major trend is also the increase in frequency and severity of weather-related events, leading to higher insurance costs.
  * There is some regulatory pressure to increase the quality and pricing of the insurance plans to address the complaints about predatory lending.

Competition is fierce within the insurance industry and can affect pricing power and therefore profit margins.

Moat Assessment

Kemper’s competitive advantages, or “moats”, are weak and can only be rated a 2/5, because they are primarily based on distribution and brand awareness, which is easily replicable.

  1. Limited Brand Recognition: While Kemper has a presence, it doesn’t have a high level of brand recognition. There is not enough brand equity to create a competitive advantage.

  2. Independent Agent Network: While Kemper relies on a network of independent agents and brokers, these relationships are not exclusive and they can work with other insurers, making them a less reliable source of competitive advantage.

    • The use of independent agents is less valuable today, since their costs are far greater, and clients prefer the direct online model, rather than having to deal with an agent or broker.
  3. Customer Stickiness: Customer switching costs within insurance are moderate, as it can take some time to gather information and get quotes, yet they are not particularly high, which means that clients will switch insurers easily, especially since there are numerous alternatives available.

Risks to the Moat and Business Resilience

  1. Intense Competition: The insurance sector is highly competitive, and competitors can easily replicate similar product offerings and pricing strategies.
  2. Catastrophic Events: As an insurer, especially in the Property & Casualty segment, Kemper faces significant risks associated with natural disasters and other catastrophic events. A hurricane in Florida or California earthquake can wreak havoc on its balance sheet, significantly impacting revenues and profitability.
  3. Regulatory Changes: Changes in regulations or legal frameworks can affect the company’s operations and pricing, and have the potential of increasing costs and/or decrease the premiums that can be extracted.

  4. Technological Disruption: New technologies are rapidly changing the way insurance is purchased, so, if they are slow to adapt they might lose market share to technologically nimble rivals.

    • Cyberattacks are also an important risk.
  • Economic Downturns: During economic downturns, it is more likely that consumers will switch to cheaper plans. This means lower margins and reduced sales for Kemper. This may force Kemper to take on even more risky borrowers to increase sales.
    1. Poor claims processing: If a company has a bad reputation for paying out on claims, that will directly affect customer loyalty and reputation.

A company with a low moat, combined with the volatility of claims, can lead to instability in performance. This is a high-risk company, that can’t be considered a defensive investment.

Financials

Kemper’s financial performance is volatile and a few key aspects that need to be understood:

  • Revenue Distribution: Kemper’s revenue streams primarily come from property and casualty premiums, life insurance premiums, and fees. The largest part of their revenue is made up of property insurance premiums, where there are lots of factors out of their control that affect their total premiums, including the weather, etc.

  • Margins: Insurance providers are particularly vulnerable to their margins. They tend to be low. Their profitability is highly susceptible to the quality of their claims underwriting (the process of deciding what to charge and to whom to give an insurance plan).

  • The company has been suffering from losses over the last year. These losses have increased due to increase in the severity and frequency of claims, but also from mismanagement of their financial structure, which is likely to be resolved, but will take time.
  • Loss Ratios: One key element of understanding an insurance company are the loss ratios, which are calculated by adding claims payments and LAE expenses and dividing them by earned premiums. Ideally, you want the loss ratios to be under 70%. Kemper’s loss ratio has been higher than this historically, which is a bad indicator.
  • Capital Requirements: They must maintain a certain level of reserves to pay potential claims, and fluctuations to their asset value can have large swings on their ability to meet their debt obligations.

Since Kemper is a cyclical business, a business cycle is likely to have huge effects on revenues, profitability, and cash flows.

Understandability

Assessing insurance companies can be particularly difficult because there are many accounting nuances in how they report numbers. The complex nature of the insurance business, including its numerous products, claims processing, and regulations, can often prove to be difficult for a layman to understand. Therefore, KMPR is a 3 out of 5.

Balance Sheet Health

Their balance sheet health is a 3/5, because it is not in the best situation right now. They do have many assets, but also a substantial debt burden. The risk of default is not very high, but not negligibly small either. Their current liquidity is still ok, but would require improvement for the business to regain financial stability.

Kemper is not a particularly safe investment and is only recommended for aggressive investors that are willing to take on the significant risks of investing in the volatile sector.

  • They also recently had their credit ratings downgraded, reflecting the worsening economic situation, and making them more vulnerable to a negative black swan event.

Recent Concerns / Controversies and Management Actions

  • Poor Performance: Kemper’s recent financial performance has been weak, with a negative outlook for the next year.
  • They had to write down 127.8 million in goodwill, due to poor performance of some recent acquisitions.
  • Cost cutting: As a response, the company has been looking for cost-cutting efforts to improve their profits, but these have not been effective so far. They announced some restructuring of the executive management team and a re-evaluation of their products. They are cutting their workforce by 9% in order to cut costs.
  • Focusing on Underwriting: Kemper’s management has placed greater focus on improving their underwriting, and has also started to improve their segmentation of the clients, which might help them improve their loss ratios.
  • Raising premiums: They are also planning to increase premiums to offset the increased costs and claims.
  • Focus on long-term results: Kemper’s management is focused on making the right strategic decisions, and also to manage risks and costs efficiently, which in the long run is going to create value for the investors and stakeholders.

While the management acknowledges the current problems and has started working on implementing solutions, they haven’t been able to show actual positive results, and this makes the stock a high-risk investment.