Kemper Hammered With Higher Losses, But The Longer-Term Value Is Still Meaningful

 

The first half of 2021 has been brutal for Kemper (KMPR), with increased claims frequency and severity decimating the profitability of the company’s core auto insurance businesses. Although Kemper can withstand these losses and is already taking steps to mitigate the impact of claims inflation, it’s going to take a few quarters (at least) to get it sorted out, and I would expect a lot of investors to stay on the sideline until they do.

Bulls can argue that this is just an adverse part of the cycle, that Kemper’s reserves will hold up, and that this could actually force more opportunistic players out of the market, improving Kemper’s long-term growth opportunities. Bears can argue that Kemper is taking bigger hits than other underwriters, undermining the claim to superior underwriting, and that the business is likely to remain very competitive.

I’m still largely with the bulls. I think Kemper got caught in a tough squeeze, where it saw rising losses but couldn’t raise rates fast enough to compensate (due to regulatory issues). Investors shouldn’t ignore the risk of worse losses over the next few quarters, but 1x book is too low for a profitable insurer and I believe more risk-tolerant investors may want to take another look here.

 

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Kemper Hammered With Higher Losses, But The Longer-Term Value Is Still Meaningful