Specialty Auto Business Expected To Thrive Amid Market Opportunities

Key Takeaways

• Kemper is achieving strong growth and profitability due to strategic market positioning, favorable regulatory environments, and effective risk management.
  
• Confidence in future earnings is evident through share repurchases, dividend increases, and strategic asset allocation, bolstering EPS and investment income.
  
• Regulatory challenges and environmental factors in California, coupled with a risky asset allocation strategy, may hinder Kemper's revenue diversification and financial health.

Catalysts

An insurance holding company, provides insurance products in the United States.

• Kemper is capitalizing on a hard market due to COVID-related inflation and a regulatory imbalance, leading to better-than-normal underwriting profitability and growth rates, impacting revenue and net margins positively.
  
• The company expects robust growth in its Specialty Auto business, driven by geographic differences in regulatory environments, which should result in increased revenue and sustained profitable growth.
  
• With a strong balance sheet, Kemper's repurchase of shares and increase in dividends indicate confidence in future earnings growth and returning capital to shareholders, positively impacting EPS.
  
• Kemper's asset allocation adjustments, moving further along the risk spectrum, are expected to incrementally increase net investment income over the next 3 to 5 quarters, supporting operational growth and thereby earnings.
  
• The company’s strategic position in California, despite its regulatory challenges, and in markets like Florida and Texas, is expected to generate continued growth and robust financial performance, impacting revenue and profitability.

Kemper Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kemper's revenue will grow by 10.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.9% today to 7.1% in 3 years time.
• Analysts expect earnings to reach $439.9 million (and earnings per share of $7.03) by about March 2028, up from $317.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.5x on those 2028 earnings, up from 13.0x today. This future PE is greater than the current PE for the US Insurance industry at 13.2x.
• Analysts expect the number of shares outstanding to decline by 0.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.81%, as per the Simply Wall St company report.

Kemper Future Earnings Per Share Growth

Risks

• Kemper faces regulatory challenges in California, such as unique regulations and increased auto minimum policy limits, which could impact revenue and profit margins.
  
• The ongoing California wildfires, despite minimal immediate financial impacts, could have long-term indirect effects that disrupt operations and increase expenses.
  
• Dependence on California for a significant portion of Kemper’s auto business could pose a risk to revenue diversification and expose the company to region-specific economic contractions.
  
• The shift toward underwriting profitability and stricter underwriting could limit growth in new policies, potentially affecting future revenue.
  
• Deciding to shift its asset allocation for investments further out along the risk spectrum could entail financial risk, potentially impacting net margins and overall financial health.

Valuation

• The analysts have a consensus price target of $84.4 for Kemper based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.2 billion, earnings will come to $439.9 million, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $64.84, the analyst price target of $84.4 is 23.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.