Kemper Corporation (NYSE:KMPR) Q4 2022 Earnings Call Transcript

Kemper Corporation (NYSE:KMPR) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Good afternoon, ladies and gentlemen, and welcome to Kemper’s Fourth Quarter 2022 Earnings Conference Call. My name is Jason Erne and I will be your coordinator today. . I would now like to introduce your host for today’s conference call, Karen Guerra, Kemper’s Vice President of Investor Relations. Ms. Guerra, you may begin.

Karen Guerra: Thank you, operator. Good afternoon, everyone, and welcome to Kemper’s discussion of our fourth quarter 2022 results. This afternoon, you’ll hear from Joe Lacher, Kemper’s President, Chief Executive Officer and Chairman; Jim McKinney, Kemper’s Executive Vice President and Chief Financial Officer; Matt Hunton, Kemper’s Executive Vice President and President of Kemper Auto; Duane Sanders, Kemper’s Executive Vice President and the Property and Casualty Division President; and Tim Stonehocker, Kemper’s Executive Vice President and President of Kemper Life. We’ll make a few opening remarks to provide context around our fourth quarter results, followed by a Q&A session. During the interactive portion of our call, our presenters will be joined by John Boschelli, Kemper’s Executive Vice President and Chief Investment Officer.

After the markets closed today, we issued our earnings release and published our earnings presentation and financial supplement. We intend to file our Form 10-K with the SEC within the next week. Our discussion today may contain forward-looking statements with the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, the company’s outlook and its future results of operations and financial condition. Our actual future results and financial condition may differ materially from these statements. These statements may also be impacted by the COVID-19 pandemic. For information on additional risks that may impact these forward-looking statements, please refer to our 2021 Form 10-K as well as our fourth quarter earnings release.

This afternoon’s discussion also includes non-GAAP financial measures that we believe are meaningful to investors. In our financial supplement, earnings presentation and earnings release, we’ve defined and reconciled all the non-GAAP financial measures to GAAP where required in accordance with the SEC rules. You can find each of these documents on the Investors section of our website, kemper.com. All comparative references will be to the corresponding 2021 period unless otherwise stated. I will now turn the call over to Joe.

Joseph Lacher: Thank you, Karen. Good afternoon, everyone. Thanks for joining us today, and welcome to our fourth quarter conference call. I want to start by saying that I’m optimistic about Kemper’s future. The quarter included improving underlying profitability masked by a few infrequent items impacting financial results. Our top priority remains returning the company to target profitability. Further, our initiatives to enable greater capital return while reducing volatility in earnings and cash flow are well underway. We are observing continuous improvement in the underlying profitability of our core businesses. Our recent strategic actions are already delivering results. I’m bullish about achieving adjusted consolidated net operating income during the first half of 2023 and producing underwriting profits during the second half of the year.

The strength of Kemper’s differentiated capabilities, market focus and enhancement initiatives positions the company to provide attractive near- and long-term returns to shareholders. In the fourth quarter, we made progress on each of our initiatives. Highlights include the following: rate-taking activities exceeded the third quarter forecast, rate approval for California specialty personal auto, cost structure enhancements aligned with third quarter commitments, continued strong profitable Commercial Vehicle growth and improved Life profitability. The current operating environment remains dynamic. This requires us to be agile, use quality and timely information and have a team that can quickly ingest adapt and respond to these changes. We have the right team in place to navigate through this period and capture the opportunities that will emerge on the back side.

As a reminder, we’ll be holding an Investor Day in New York on Thursday, March 9. This will be a great platform to discuss Kemper’s journey to date and the road ahead. The event will include presentations from myself and Jim as well as Matt Hunt, who leads our Specialty Auto franchise; and Tim Stonehocker who’s responsible for our Life business. As a result, Matt and Tim are joining our usual speakers today. I’ll now turn the call over to Jim to discuss additional details on our operating results and an update on our strategic initiatives.

James McKinney: Thank you, Joe. I will begin on Pages 4 and 5 with our consolidated financial results. For the quarter, we generated a net loss of $0.87 per diluted share and an adjusted consolidated net operating loss of $0.41 per diluted share. This included unfavorable prior year reserve development of $8 million and $9 million of catastrophe losses in the quarter. The ongoing environmental challenges facing the P&C and life insurance industries continue to impact Kemper’s financial results. Significant factors include severity trend inflation, seasonality and modest adverse development and while moderating elevated mortality. Our energy and efforts remain concentrated on restoring the business to profitability and the inputs that will enable us to achieve our target returns.

These include filing for additional rate, implementing further underwriting actions and reducing expenses. The combination of profit actions earning in — at an accelerated pace, improvements in expense run rates and reduced mortality in our Life business will lead to continued improvement in our financial results. Turning to Slide 6. To enable greater insight into our underlying results we have included an underlying reported to normalized combined ratio walk. It details the biggest items impacting our P&C ratios. This includes seasonality and modest reserve development. Normalizing for these items, we saw approximately 1 point of sequential improvement in Specialty’s underlying combined ratio and approximately 3.5 points of improvement in preferred P&C.

Moving to Page 7. This quarter, we had modest prior year and intra-year development. It was driven by elongated settlement time lines for third-party claims, additional defense costs driven by an increase in litigated PIP claims and a decline in salvage values relative to used car prices. Consistent with our reserving philosophy, we react quickly and provide operating transparency into trend changes. Despite the challenges today’s environment creates, we are able to accomplish this due to the quality and speed with which we gather and act upon information. This allows us to maintain appropriate reserves. Recall that for the year, we had favorable prior year development of approximately $17.4 million. Moving to Page 8. Last quarter, we announced several operating model enhancements to improve productivity and growth including expense reductions.

These initiatives are on track, and we expect to deliver on each of our commitments. During our fourth quarter, we secured approximately $61 million in run rate savings. This included 0.6 points or $34 million improvement in our LAE ratio, approximately $18 million in enterprise expense reductions and $9 million in savings from real estate optimization. Turning to Page 9. We highlight the strength of our balance sheet. We have appropriately capitalized insurance businesses and a healthy liquidity balance of $1.3 billion. Further, we continue to have the capital needed to navigate this environment and appropriately invest in the advancement of core capabilities. In addition, as previously disclosed, we are committed to reducing debt outstanding by $150 million and bringing our debt-to-capital ratio back to our long-term target of 17% to 22%.

Moving to Page 10. Net investment income for the quarter was $106 million. New investment yields are up 250 to 300 basis points over the prior year, leading to a pretax equivalent annualized book yield of 4.6%. We estimate $275 million to $325 million of our fixed income portfolio will be subject to reinvestment in 2023. This will provide incremental improvements to future investment income. On Page 11, we provide an update on our strategic initiatives. During the quarter, we submitted our initial filings with the Illinois Department of Insurance to establish a reciprocal exchange. We also formed Kemper Management LLC to serve as the reciprocals attorney-in-fact. The project is on track, and we expect to write premium in the structure during the third quarter of 2023.

Additionally, we completed the sale of Reserve National Insurance Company and its subsidiaries otherwise known as Kemper Health to Medical Mutual of Ohio on December 1. Finally, as indicated on our third quarter call, we initiated a strategic review of Kemper Personal Insurance, our preferred home and auto business. We continue to explore options and we’ll share additional details when available. I will now turn the call over to Matt to discuss the Specialty P&C business.

Matthew Hunton: Thank you, Jim, and good afternoon, everyone. Moving to Page 12 and our Specialty P&C business. Aligned with Joe’s earlier comments, we are laser-focused on restoring the business to target profitability. Our actions are outpacing loss cost trends and underlying profitability is improving. As noted on Page 6, during the quarter, the specialty auto book reflected a sequential normalized underlying combined ratio improvement of approximately 1 point, driven by the realization of earned rate exceeding loss trend. Let me comment on the 2 components of Specialty Auto business. Since the third quarter of 2021, on a weighted average basis across our entire personal auto book, we have filed for approximately 43 points of rate.

Through the fourth quarter, 21 points have been approved and are effective in the market with 8 points of that having been earned. As we move forward, we will continue to file rate aligned to loss cost trends. Shifting to Commercial Vehicle, the business continues to perform well. For the year, the underlying combined ratio was 93.8%, year-over-year net written premiums grew 33% and policies in force grew 17%. To reaffirm, the segment is expected to see additional improvements in the first quarter and deliver underwriting profits in the second half of 2023. I will now turn the call over to Duane.

Duane Sanders: Thank you, Matt. Now we’ll turn to Page 13. Similarly to the specialty auto business, the preferred segment is focused on restoring profitability. As noted on Page 6, preferred quarter was impacted by a few unusual items. This includes seasonality and modest prior quarter reserve development. On a normalized basis, the underlying combined ratio improved by approximately 3.5 points. As we look forward for the next couple of quarters, we expect the rate and non-rate actions we have taken and will continue to take to keep pace with trend, and we will deliver profit improvement in the second half of the year. I will now turn the call over to Tim to cover the Life business.

Timmy Stonehocker: Thank you, Duane. Turning to our Life & Health business on Page 14. Despite higher levels of inflation impacting our market segment, the business continues to see strong sales demand and good persistency. New business sales are aligned with prepandemic levels and profitability continues to improve with pandemic-related headwinds subsiding. . Excess mortality has declined for the last 3 quarters, and we are nearing prepandemic mortality levels and expect continued improvements. In addition, the business continues to benefit from new investment yields at or above our pricing assumptions. The combination of these items will lead to additional improvements in our financial results. I’ll now turn the call over to Joe.

Joseph Lacher: Thanks, Tim. Turning to Page 15. In summary, I continue to be optimistic about our prospects. You should leave this call with a strong understanding of the following: first, the financial benefits of our initiatives will earn into the book on an accelerated basis. We expect to be profitable in the first half of the year and make an underwriting profit during the second half. Second, the inputs that drive profitability continue to trend positively, including rate in excess of loss trend, improving mortality and interest rates above pricing assumptions. Third, restructuring and integration efforts are on track to produce targeted expense savings. And lastly, our reciprocal and Bermuda capital initiatives provide short- and long-term opportunities to further optimize capital and reduce risk.

We are confident in the actions we have taken in response to increased loss costs seen over the last 18 months. We are trending in the right direction. Enhancements in our operating model will further advance profitability gain. Finally, I want to thank our entire Kemper team for their collective effort and dedication. With that, operator, we can now take questions.

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Q&A Session

Operator: . Our first question is from Greg Peters with Raymond James.

Charles Peters: To start off with, Joe, thanks for the guidance that you’ve provided regarding expectations for operating income in the first half of ’23 and underwriting profitability in the second half of ’23. I’m wondering how the rate actions that we’re seeing that you filed for the first quarter ’23. How those come into play and intersect with the guidance that you provided? Or is the guidance you provided really a reflection of the previous rate action you’ve taken?

Joseph Lacher: Greg, thanks for the comments. The bulk of it is going to be driven by — particularly the first half of the year is going to be driven all by actions that are already taken. If we file for something in the first quarter, the likelihood of it being approved and effective and then working into the written rate and the earned rate, it will have a de minimis impact on the first half of the year. It could, if it were approved early enough in the year, start to be written in and have some impact on the back half of the year. So those could affect it. You should assume, though, that our statement that we’re expecting to make profits in the first half and an underwriting profit during the second half to be regardless of whether or not we get an approval on the first quarter numbers.

Charles Peters: Okay. That’s appropriate. Can you pivot and maybe this is a good opportunity for Matt to chime in, Duane, but it seemed like you’re calling out Florida PIP again? And then I look at the policy count growth and the decline, can you give us a sense of where is this across the network? Or is this regionally specific or some color around where the problems — where the real hotspots are at this moment in time?

Joseph Lacher: Sure, Greg. And I’m going to start with a quick comment then I’m going to actually ask Jim to because I would tell you this is a function, maybe a little less operational and a little more of how it’s working through some of the reserving numbers. Maybe, Jim, you offer some comments and these guys want to add?

James McKinney: Yes, Greg, thank you, Joe. I think the big element that what we see kind of in this quarter, and again, maybe it’s some of the changes in the assignments of benefits or other elements is we’ve seen an additional amount of litigation activity associated with PIP claims, obviously, in Florida. That change caused us to take — revisit a little bit when we look back across this year and in prior years and then going forward, what we think that litigation rate is going to be. We don’t importantly see a difference in terms of what we’re seeing from a severity side that’s notable. This is purely about the defense cost and making sure that we’ve got the right dollar amounts that are associated with that here kind of given, again, that increased frequency with which that’s occurring.