Kemper Corporation

Good day, ladies and gentlemen, and welcome to Kemper Corp's second quarter 2020 earnings conference call. My name is Cole, and I will be your coordinator today. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded for replay purposes. I would now like to introduce your host for today's call, Christine Patrick, Kemper's Vice President of Investor Relations. Mrs. Patrick, you may begin.

Thank you, operator. Good afternoon, everyone, and welcome to Kemper's discussion of our second 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 second 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 markets closed this afternoon, we issued our earnings release and published our second 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 condition. These statements may also include 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 second quarter 2020 Form 10-Q, as well as our second 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 acquisitions. 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 the non-GAAP financial measures to GAAP where 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 to the corresponding 2019 period unless otherwise stated. Finally, I would like to note that due to the social distancing practices that Kemper is following 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 thank you for joining us today. We continue to find ourselves in unique times. The pandemic is impacting consumer behavior, the macroeconomy, the investment environment, and how we conduct our business operations. We expect that to be the case for the foreseeable future. While the effect of these items can be seen in various parts of our financials, in aggregate, we continue to deliver strong results. We remain confident in our business model, our financial position, and our ability to continue to serve our customers and deliver value for our shareholders. Let's now turn to page four to discuss our results this quarter. We recorded strong results in the second quarter in spite of the environmental challenges we faced. Net income was $126 million, or $1.91 per fully diluted share. Adjusted consolidated net operating earnings were $79 million, or $1.20 for fully diluted share. We generated a rolling four-quarter return on tangible equity, excluding unrealized gains of 19%. We've talked a lot over the last few years about the value of our diversified model and how it enables us to deliver consistent returns. The positive investments and enhancements we've made across our businesses have resulted in significantly improved earnings and stable cash flows through both favorable as well as challenged economic environments. Additionally, the model provides meaningful capital efficiency. Together with strong execution, these advantages enable us to consistently generate attractive returns for our shareholders. Our results in the current environment highlight the benefits of the model. As we previously disclosed, our specialty and preferred auto businesses provided customers approximately $100 million in premium credits during the second quarter. Our thought process follows a simple principle of providing attractively priced policies to our customers while delivering reasonable returns to our shareholders. This matches customer expectations, allows us to significantly grow the business, and to maximize shareholder value over time. The pandemic has impacted most of the inputs and the auto pricing equation to some degree, and the credits allow us to deliver pricing consistent with that principle. We will continue to monitor the impacts of the pandemic and consistently apply this concept going forward. Our specialty auto business continued its trend of strong performance in the quarter. Margins remained solid, and we were able to provide attractive pricing to our customers. This resulted in significant policy growth and further strengthened our market position. Additionally, we continue to invest in our platform and capabilities, which will allow us to better meet the needs of our customers and drive future market share gains. Our preferred segment also delivered a solid quarter. Both our auto and home and other lines showed continued improvement in underlying combined ratios as a result of ongoing profit improvement actions across the segment. While we are pleased with our progress, we continue to evaluate a number of actions that will lead to sustainable and profitable growth. Similar to our other businesses, life and health was also impacted by the pandemic. Increased mortality experience was offset by reduced morbidity in our health book, and net investment income was down as first quarter market challenges were recognized in the quarter. While we expect some near-term volatility in benefit costs related to the pandemic, we remain positive about the long-term prospects and the strategic diversification benefits the life and health business brings to our organization. Our strong balance sheet and ample capital and liquidity provide significant financial flexibility. This not only allows us to support our businesses through turbulent times, but also enables us to act on the opportunities that may present themselves in the current environment. In summary, we successfully delivered profitable growth in an uncertain macro environment. We made important investments and enhancements to our capabilities. We strengthened our competitive advantages, and we delivered significant value to our shareholders. With that, I'll turn the call over to Jim to discuss our consolidated operating results in more detail. Thank you, Joe, and good afternoon, everyone. Turning to our results on page five, net income for the quarter was $126 million, or $1.91 per diluted share. This represents a 3% increase in net income versus the second quarter of 2019. Adjusted consolidated net operating income was $79 million. Our ability to deliver strong top-line growth solid margins, and attractive returns in an uncertain operating environment is a testament to the resiliency of our business model. On page six, we isolate the key sources of volatility. This was marked by pressure and alternative investments, seasonally elevated CAD activity, and increased prior year development. Duane will touch on CAD activity and the development later in the discussion. One additional item of note is this quarter's strong equity market performance. It resulted in the recovery of a significant portion of the losses we experienced in Q1 within our equity portfolio. Turning to page 7, net investment income, including COLE, for the quarter was $68 million, down from $97 million in the quarter of 2019. Approximately 66% of the decrease was driven by our alternative investments, which put pressure on our annualized portfolio yield. I'll remind you that many of these investments report on a lag. so the reduction reflects the pressure we saw in financial markets during the first quarter. Our portfolio composition and strategy remains consistent and focus on high-quality fixed-income investments. As of the second quarter, 93% of our fixed-income portfolio consists of investment-grade securities. From a credit perspective, the portfolio continues to perform. Impairments were roughly 10 basis points. Broadly speaking, the quality and the diversity of the portfolio continues to effectively support our businesses. Page 8 provides a walk of net investment income from 2Q19 to 2Q20. Aside from the impact of alternatives, our net investment income yielded solid returns. While rate movements were stark over the quarter, our portfolio remained relatively resilient. This is in large part due to actions we've taken over prior quarters to address the risk of lower for longer interest rate environment, which included extending the duration on a large portion of our fixed income portfolio. As of the second quarter, our weighted average maturity was 12 years with an effective duration of seven years. Turning to page nine, our capital liquidity remains strong. We have $943 million of committed and contingent liquidity, an increase of over $75 million compared with the end of 2019. We generated over $200 million of cash in the quarter and have generated over $560 million over the last 12 months. This is a testament to our diversified model, which is designed to produce stable cash flows through favorable as well as challenging economic cycles. Broadly speaking, our capital management strategy remains unchanged. Our capital stack continues to provide significant financial flexibility to support our businesses and take advantage of market opportunities. Our insurance entities remain well capitalized. Our debt-to-capital ratio is below 16%, and we have no near-term debt maturities. On page 10, I'd like to highlight some of the capital metrics we track closely, including growth intangible book value per share and tangible return on equity. Together, these metrics demonstrate the efficiency of our capital deployment decisions and intrinsic value creation. Over the last year, we have increased shareholder value by approximately 17% as measured by growth intangible book value and cumulative dividends. This is driven by the team's strong execution capabilities and business model. Our operating model continues to generate strong returns over the quarter with a rolling four-quarter return on tangible equity, excluding unrealized gains of 19%. This is the fifth consecutive quarter of delivering tangible returns in high teens, low 20s area. In summary, we are pleased with our financial performance over the quarter. Our strong balance sheet, financial flexibility, and diversified operating model position us to deliver continued growth amid economic uncertainty and serve as a source of strength for all our stakeholders. I would now like to turn the call over to Duane to discuss the results of our P&C segments.