Kemper Corporation

Thank you, Operator. Good afternoon, everyone, and welcome to Kemper's discussion of our first quarter 2020 results. This afternoon, you'll hear from Joe Locker, Kemper's President and Chief Executive Officer, Jim McKinney, Kemper's Executive Vice President and Chief Financial Officer, and Dwayne Sanders, Kemper's Executive Vice President and the Property and Casualty Division President. We'll make a few opening remarks to provide context around our first quarter results and then open up the call for a question and answer session. During the interactive portion of the call, our presenters will be joined by John Buscelli, Kemper's Executive Vice President and Chief Investment Officer, and Eric Sternberg, Kemper's Executive Vice President and Life and Health Division President. After the market closed this afternoon, we issued our earnings release and published our first quarter earnings presentation, financial supplement, and Form 10-Q. You can find these documents on the investor section of our website at Kemper.com. Our discussion today may contain forward-looking statements within 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 conditions. These statements may also include the impacts related to the COVID-19 pandemic. Our actual future results and financial condition may differ materially from these statements. For information on potential risks associated with relying on forward-looking statements, please refer to our 2019 Form 10-K, our first quarter 2020 Form 10-Q, as well as our first quarter earnings release. This afternoon's discussion also includes non-GAAP financial measures we believe are meaningful to investors. One such measure I would like to highlight again is as adjusted for acquisition. It is clearly important to understand our reported results, including the impact the Infinity acquisition has to Kemper overall. However, investors have also expressed an interest in understanding the underlying organic performance of the combined businesses. Since our as-reported financials don't include Infinity's historical information prior to the closing of the acquisition, and our current results include the impact of purchase accounting, the underlying trends are not easily visible. In an effort to provide insight into the underlying performance of the combined businesses, we also display our financials as adjusted for acquisition. This view removes the impact of purchase accounting and includes historical infinity information for periods prior to the closing of the acquisition to more easily provide a meaningful year-over-year comparison. In our financial supplement, presentation, and earnings release, we have defined and reconciled all of the non-GAAP financial measures to GAAP. We're required in accordance with SEC rules. You can find each of these documents on the investor section of our website at Kemper.com. All comparative references will be made to the corresponding 2019 period unless otherwise stated. Finally, I would like to note that due to the social distancing practices that Kemper enacted in response to the COVID-19 crisis, Our call participants are not in the same location. This may cause the question and answer section of our call to feel disjointed at times. We apologize in advance and ask for understanding from our listeners. I will now turn the call over to Joe.

Thank you, Christine. Good afternoon, everyone, and thanks for joining us today. Before beginning our usual discussion, let's take a few minutes to recognize these unusual times. I first like to acknowledge the human toll this pandemic is taking and express our thoughts and compassion for the individuals and families that have been impacted, whether through illness, death, unemployment, or those working on the front lines. As we continue to move through the dynamic circumstances of the COVID-19 crisis, I want to acknowledge the efforts of our 9,100 employees. I'm very proud of the way our team has risen to the challenge and focused on supporting the well-being of all of our stakeholders. On page three, I'd like to highlight a few of the ways Kemper's responding to the current situation. Our first priority continues to be the health and safety of our customers, employees, and partners, as well as their families. In the early phase of this crisis, the focus was on doing our part to help flatten the curve and protect the healthcare system's availability for those who might need it. We acted quickly to engage in social distancing practices, we have nearly 95% of our employees working remotely while continuing to meet the needs of our customers at normal service levels. For our employees in the office, we're maintaining appropriate social distancing to keep everyone safe and healthy. We announced a 15% credit for our auto policyholders towards their April and May premium, and we're extending grace periods for any of our customers experiencing financial strain. We've instituted a commission stabilization program for our Kemper Life employee agents, who were forced to temporarily suspend new business sales due to the crisis. We're also providing assistance to enable our community to meet the urgent needs created by the COVID-19 crisis. The company recently announced a commitment of a million dollars to support organizations focused on critical issues, including food insecurity and supporting frontline medical personnel. These types of organizations are doing extraordinary work. We're proud to support our customers, employees, and communities, At the same time, we maintain a strong focus on effective execution and continue to grow our business to meet the needs of all our stakeholders. Now let's turn to page five to discuss our quarterly results. This was a unique quarter with January and February continuing the solid top line growth we experienced throughout 2019 before the impact of the COVID-19 crisis started to appear in March. Overall, earned premiums grew 9% in the first quarter, in line with growth rates we experienced in 2019. First quarter net income was $64 million or $0.95 per share. Adjusted consolidated net operating earnings were $163 million or $2.43 per share. We generated a rolling four-quarter return on tangible equity, excluding unrealized gains of 20%. Our ability to generate that level of return through this environment speaks to the strength and performance of our model through the ups and downs of the business cycle. Our specialty business saw top-line growth of 13%, driven by broad growth across all geographies, continued geographic expansion, and enhanced new business opportunities in Florida, resulting from the exit of a competitor. We were able to maintain solid top-line growth at attractive margins, with an underlying as-adjusted combined ratio of 93%. Operating results from our preferred insurance segment improved this quarter as underwriting actions and the repositioning of our book continued in earnest. Given the modest size of the business and efforts to enhance and refine products we offer, we continue to expect a higher level of volatility in quarterly results. That said, we are pleased with the progress reflected in this quarter's financials. In our life and health segment, we welcome Eric Sternberg as the division's new president. Eric's breadth and depth of experience within life and health will help us continue to thoughtfully grow these businesses. From a financial standpoint, given the backdrop of the current environment, the segment delivered another quarter of solid earnings and continues to provide diversifying cash flows to the organization. Now let's turn to Kemper's financial strength. Over the past few years, Kemper has developed into a strong and stable organization that is a source of security for our stakeholders in uncertain times like the one we currently face. We continue to be recognized by rating agencies for our improved performance. I'm pleased that during the quarter, S&P upgraded our key financial strength rating to A and the holding company senior debt ratings to BBB. This follows the positive rating actions of Fitch and Ambest that I noted on our fourth quarter earnings call. Our balance sheet is strong, with a low debt-to-capital ratio of 17%, no near-term debt maturities, a diversified investment portfolio, and significant committed contingent capital by institutions classified as CIFIs. Through April 1st, we repurchased $110 million of Kemper stock. This roughly equates to both the shares issued in conjunction with the redemption of the hybrid notes in 2019 and the after-tax net amount of the CSE judgment, of which we received the remaining balance this quarter. With that, I'll turn the call over to Jim to discuss our consolidated financial results in more detail. Thank you, Joe, and good afternoon to everyone on the call. I'd first like to echo Joe's comments, acknowledging the human toll this pandemic continues to take and express my sympathy for the many individuals and families that have been affected. Turning to the results for the quarter on page six, net income was 64 million compared with 155 million in the prior year. Excluding the impact of purchase accounting, adjusted consolidated net income grew to 163 million. Net results this quarter were heavily impacted by the decline in fair value of equity and convertible securities, driven by the global financial market sell-off. On page 7, we isolate the key sources of volatility, including $89 million we received as satisfaction of the remaining balance of the CSC judgment. Our results in the quarter demonstrate that our business is strong and continues to perform well with solid financial results. Turning to page 8, in this challenging time, I'd like to take a moment to remind individuals of our ongoing focus on risk management. Big picture, we strive to maintain capital and liquidity sufficient to sustain target ratings using the greater of two risk test. To be clear, the capital and liquidity levels referenced here are to uphold target credit ratings versus solvency, a much more conservative framework to manage risk. The first test is an annual stress simulation to ensure the entity has sufficient capital and liquidity to meet the needs of our operations through a 1-in-200-year event. The second stress simulation is an over-the-life of the liability assessment that is intended to capture the liquidity and capital needs through a 1-in-50-year event. Like the Federal Reserve stress test, our 1-in-200 and 1-in-50 events include a broad range of stress events, including market setbacks, operational challenges, regulatory uncertainties, and catastrophes. This approach helps ensure we are a strong company through challenging economic periods. As Joe touched on, our focus on strengthening the Kemper franchise and our risk management capabilities over the past few years have been recognized in recent months through ratings upgrades from S&P and Fitch and an improved outlook from AMBEST. With those reference points, I would like to start by reviewing some of the key financial data points that highlight the strength of our balance sheet. First, we have over $871 million in liquidity, many multiples of our fixed costs. Second, our diversified model is designed to produce positive cash flow through volatile economic periods. In the quarter, operating cash flow was $62 million. A final item is our attractive capital stack. It is highlighted by strong capitalization of our insurance entities, a debt-to-capital ratio of 17%, and no near-term debt maturities. Our balance sheet is strong with significant financial flexibility. An important item to note is our recent stock repurchases. Through April 1st, we repurchased $110 million of Kemper stock. $101 million of these repurchases occurred during the first quarter. As Joe mentioned in his comments, this amount roughly equates to the after-tax amount of the CSC payments. and the shares issued in conjunction with the redemption of the hybrid notes in 2019. When we issued those shares, we were seeing and expected to continue to see tremendous growth and momentum in our specialty auto business. And there was uncertainty around the timing and amount of the proceeds from the CSC judgment that could help fund this growth. With the proceeds in hand, we felt the right thing to do for our long-term shareholders was to repurchase these shares. We did so at an 18% discount to issuance price. We have not repurchased any shares since April 1st. We have roughly $130 million remaining on our $300 million share repurchase authorization from August 2014. This quarter, the Board expanded this authorization by $200 million, providing roughly $330 million in repurchase capacity. While we do not have near-term plans to repurchase additional shares, if Kemper trades significantly below what we believe the company's intrinsic value is, we have the capacity and capabilities to capture this value for our long-term shareholders. Turning to page nine, I again want to highlight some of the capital metrics we track closely, including tangible book value per share, tangible return on equity, and cash generation, which together reveal the efficiency of our capital deployment decisions and intrinsic value creation. In the quarter, tangible book value per share, excluding unrealized gains, was flat compared with the fourth quarter. Solid operating performance was offset by mark-to-market impacts from market volatility. That said, our returns remain strong, with an industry-leading four-quarter rolling return on tangible equity, excluding unrealized gains of 20%. Turning to page 10, net investment income grew slightly over the first quarter of 2019 to $86 million. As our investment portfolio continues to grow, In the first quarter, we began including income from our COLE investments in our core portfolio net investment income. This is reflected on a historical basis in the charts on this page. We made this presentation change as a result of the increased allocations we have made to the investment class. The annualized book yield of the portfolio declined to 4%. The decrease was largely a result of this quarter's global market movements. Similar to many of our peers, given the current market volatility, we believed it would be helpful to expand our discussion to provide additional transparency into our investment portfolio. Page 11 offers more detail on the fixed income categories of our portfolio that are most exposed to the economic impact of COVID-19. We've identified these areas as retail, energy, transportation, and leisure. As you can see from the slide, our exposure to these sectors is less than 1% of our total investment portfolio. It is well diversified and concentrated in above investment grade assets. Turning to page 12, you can see more detail on our below investment grade portfolio. It is diversified across different asset types and at 5% of our fixed income investments is a relatively small portion of our overall portfolio. Page 13 gives more detail on our CLO exposure. The majority of the portfolio is invested in highly rated assets with 83% rated A or higher. Finally, on page 14, we break down the largest components of our alternative holdings. The primary focus of our alternative portfolio is current income generation. It is diversified across strategies focused on private credit, private equity, and hedge funds. Similar to others, roughly 95% of this portfolio has a reporting lag. This means that a portion of this quarter's global market disruption will bleed into next quarter's investment results. In closing, we are well positioned to be a source of strength for our stakeholders through this environment. And with that, I'll turn the call over to Duane to discuss the results of our P&C segments.

Thank you, Jim, and good afternoon, everyone. Let's begin with the specialty segment on page 15. The specialty segment was highlighted by another quarter of strong growth. Segment income of $60 million was driven by net earned premiums of $823 million, an increase of 13% from the prior year's quarter. Policies and force increased 10%, excluding the sale of classic car. As you can see in the chart on the top right of the slide, we continue to experience strong growth across all significant geographies. Our trailing 12-month growth was 6% in California, 23% in Florida and Texas, and 42% in our expansion states. As previously noted, Florida has been a robust growth market for us. It was further amplified in the quarter by the exit of a competitor. Growth in the first two months of the quarter was robust and in line with our recent results. This growth rate slowed in March as stay-at-home orders related to the COVID-19 crisis were implemented. As part of our response to the crisis, we have provided a 15% credit to our auto customers towards their April and May premiums, totaling roughly 100 million, reflecting fewer miles driven and the resulting decline in frequency. We continue to experience growth at attractive margins with an as-is adjusted underlying combined ratio in the quarter of 93%. During the quarter, losses in the segment were impacted by three items. First, in anticipation of increased volumes of new business, we increased headcount with our claims staff to support this plan growth. We expect this to normalize throughout the year. Second, we recognize a loss severity development due to the changing in macroeconomic environment. This includes, among other things, changes in used car values, changes in salvage values, and the related impacts around repair costs. Lastly, we recognized a legal item related to Florida PEP. The long-term growth outlook for the specialty segment remains strong. The tailwinds we have experienced over the past few quarters are intact, but the COVID-19 situation has created some near-term watch items. Turning to the preferred insurance segment, On page 16, segment income was $18 million for the quarter with an underlying combined ratio of 92%, compared with the segment income of $3 million with an underlying combined ratio of 96% in the first quarter of 2019. Segment income increased to a broad array of profit improvement actions taken in our auto and home books that have resulted in lower overall loss activity. While we continue to make strides towards reaching our preferred insurance segment profitability targets. Given the relative size of the book, we expect results to remain volatile for a period of time. I'll now turn the call back to Joe.