Over the past six months, Kemper’s shares (currently trading at $26.50) have posted a disappointing 14.8% loss, well below the S&P 500’s 16.4% gain. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
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Why Do We Think Kemper Will Underperform?
Even though the stock has become cheaper, we’re passing on Kemper for now. Here are three reasons you should be careful with KMPR, plus one stock we’d rather own.
1. Declining Net Premiums Earned Reflect Weakness
When insurers sell policies, they protect themselves from extremely large losses or an outsized accumulation of losses with reinsurance (insurance for insurance companies). Net premiums earned are therefore gross premiums less what’s ceded to reinsurers as a risk mitigation and transfer strategy.
Kemper’s net premiums earned has declined by 3.3% annually over the last five years, much worse than the broader insurance industry and in line with its total revenue.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Kemper, its EPS declined by 14.5% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. Declining BVPS Reflects Erosion of Asset Value
Book value per share (BVPS) serves as a key indicator of an insurer’s financial stability, reflecting a company’s ability to maintain adequate capital levels and meet its long-term obligations to policyholders.
Disappointingly for investors, Kemper’s BVPS declined at a 5.3% annual clip over the last two years.
Final Judgment
We see the value of companies helping consumers, but in the case of Kemper, we’re out. After the recent drawdown, the stock trades at 0.7× forward P/B (or $26.50 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d recommend looking at the most entrenched endpoint security platform on the market.
Stocks We Like More Than Kemper
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