Kemper Corporation

Good afternoon, ladies and gentlemen, and welcome to Kemper's fourth quarter 2020 earnings conference call. My name is Matt, 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 this time. As a reminder, this conference call is being recorded for replay purposes. I would now like to introduce your host for today's conference call, Christine Patrick, Kemper's Vice President of Investor Relations. Ms. Patrick, you may begin. Ms.

Thank you, Operator. Good afternoon, everyone, and welcome to Kemper's discussion of our fourth 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 fourth quarter and full year 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 fourth quarter earnings presentation and financial supplements. We intend to file our Form 10-K with the SEC on or about February 10th. 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 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 as well as our fourth quarter earnings release. This afternoon's discussion also includes non-GAAP financial measures we believe are meaningful to investors. In our financial supplement presentation and earnings release, we have defined and reconciled all the non-GAAP financial measures to GAAP were 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 social distancing practices 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 on today's call. By any measure, 2020 was a challenging year, and the reasons why are well known at this point. I'd like to again acknowledge and thank everyone across our nation who stepped up during these challenging times. I'd especially like to thank our employees whose professionalism and commitment to our customers has been exceptional. Against this backdrop, I'm very pleased with our 2020 performance. We generated over $400 million of net income and nearly $440 million of adjusted, consolidated net operating income. more importantly a year ago we highlighted key metrics that guide our capital management and investment decisions we continue to believe you should use these to measure our long-term performance and when you do 2020 was a great success tangible book value per share increased 15 return on tangible equity excluding unrealized gains increased 16 we generated 425 million dollars of cash from operations and we continued to grow both top and bottom lines. Additionally, we've made investments to grow the strength of our franchise and further strengthen an already strong balance sheet. A few notable items include the acquisition of American Access Casualty Company, geographic expansion and increased levels of claims staff to support our expanding customer base, and the transfer of a significant portion of our pension liability to a third party. It was a strong year and we're well positioned for future success. I now like to turn to page four to discuss some specifics for the quarter. Net income was $98 million, or $1.46 per share. Adjusted consolidated net operating earnings were $106 million, or $1.59 per share. Turning to segment results, specialty auto had a solid finish to the year. Earned premiums increased 10% annually, adjusting for the credits issued in the second quarter. Customer growth continued and our position in the market strengthened as we were able to drive both new and same-store sales growth. Notwithstanding periods of COVID-related new business slowdowns across our portfolio, our customer base and demand for our products have been resilient and strong. We continue to invest in our specialty platform and capabilities, which we expect to continue to drive future market share gains. Turning to our life and health segment, Earnings continue to be impacted by COVID related mortality in line with domestic trends. Despite what is roughly equivalent to a one in a hundred year PNC catastrophe event, the business has generated positive operating earnings. Turning to page five, during the quarter, we announced the acquisition of American Access Casualty Company, that $370 million cash transaction. The addition of the AAC platform accelerates the expansion of our specialty franchise. It gives us increased scale in new and under-penetrated geographies where we have an opportunity to accelerate growth and expand our agency network. It enhances our customer reach with a focus on low-limit auto policies and further enhances our specialty capabilities within the Hispanic market. The acquisition also aligns with our previously communicated capital deployment guidance. In summary, we had a solid quarter a year. Our strategy is resilient and sustainable. and has consistently generated attractive returns for shareholders. We're also pleased that last week AMBEST upgraded our key financial strength rating to A and the holding company senior debt ratings to BBB. This is a further testament of our strong operating performance and ongoing progress. I'd now like to turn the call over to Jim to discuss our fourth quarter and full year operating results in more detail. Thank you. I would like to echo Joe's sentiment that we are pleased with our 2020 financial performance. Turning to page six, you can see the results of our focused and consistent strategy execution and the solid results it has yielded. For the quarter, we reported net income of $98 million and adjusted consolidated net operating income of $106 million, or $1.59 per diluted share, an increase of 10% over the prior year quarter. On page seven, we highlight that our business model continues to produce high-quality operating income. This is illustrated through an isolation of key sources of volatility that impact quarterly results. For the quarter, volatility items had a five-cent impact on adjusted consolidated net operating income. Turning to page eight. Building on Joe's previous comments, we are committed to always seeking new ways to improve the organization. This quarter, we took advantage of market demand to reduce Kemper's pension benefit obligation to $382 million from $660 million at the end of 2019. This included lump sum payments and the previously disclosed purchase of group annuity contracts. These actions removed a non-value-added risk, further strengthening an already strong balance sheet. On page 9, I would like to highlight some of the key capital metrics we use to track our performance, including growth intangible bulk value per share and tangible return on equity. Notably, we continue to outperform our stated long-term return targets. Excluding unrealized gains, return on tangible equity was 16% and our growth intangible bulk value per share was 15%. These metrics demonstrate the efficiency of our capital deployment decisions and our intrinsic value creation for shareholders. Continuing on page 10, our capital and liquidity positions remain strong, supported by a healthy balance sheet with well-funded insurance entities. For the year, we generated $425 million in operating cash flow and ended the year with a debt-to-capital ratio of 20% within our stated range of 17% to 22%. Our business model has performed as designed, generating solid cash flows and providing substantial financial flexibility to fund growth. Turning to page 11, net investment income for the quarter was 103 million, reflecting strong alternative investment income as financial markets rebounded. Our well-diversified portfolio continues to deliver solid results. Low market yields are a challenge for the industry, but our portfolio construction has alleviated some reinvestment risk. Over the next 12 months, we have approximately 100 million of assets maturing for roughly 1% of the portfolio. This low amount of maturities achieved through thoughtful asset liability management helps minimize net investment income volatility. In closing, we are pleased with the company's financial performance for the quarter and the year. Our strong balance sheet, financial flexibility, and stable operating results allow us to serve as a source of strength for all of our stakeholders. I would now like to turn the call over to Duane to discuss the results of our P&C segments. Thank you, Jim, and good afternoon, everyone. I would like to begin with the specialty segment on page 12. The segment continues to perform well, generating $91 million of operating earnings in the quarter. Turning to the top line, earned premiums increased 10 percent, and policies in force were up 4 percent. In the quarter, we saw increased state and local shutdowns, particularly in California. Similar to initial shutdowns, this resulted in reduced new business volume. We anticipate that just like we saw earlier in the year, this will be a short-term impact as states reopen and economies rebound. The underlying combined ratio was 91% in the quarter and 89% for the full year. We continue to experience largely COVID-related decreases in frequency, along with the industry. With another round of state shutdowns in the fourth quarter and varied reopenings, we've taken a cautious approach to our loss picks similar to our response to the initial shutdowns. Looking at expenses, the quarter saw noise coming from a couple of places. First, it was impacted by the mix shift, which comes from a few areas. The mix of new and renewal business and the largely anticipated geographic mix of state and product. These impacts on expense ratio are anticipated in our pricing. Beyond mix, we had a few one-time items. There was an increase in contingent commissions paid to agents due to higher than average profitability. We also made enhancements to our infrastructure, the cost of which was recognized this quarter. We continue to build our systematic sustainable competitive advantages and geographic footprint within specialty, which will be accelerated by our acquisition of American Access. AAC's customer profile is similar to that of our legacy Alliance United book in California. It expands the low limit customer focus to a broader geographic footprint and attractive specialty markets, including Texas, Illinois, Nevada, Arizona, and Indiana. The business model is scalable, providing growth opportunities in new and existing geographies. In addition, their distribution relationships strengthen our agency network and give us access to a captive channel with deep ties in Hispanic communities. We look forward to welcoming American access to the Kemper team. Let's turn to the preferred segment on page 13. In our preferred auto business, we continue to evolve the product, which is reflected in our results this quarter. As we position the business for target profitability, our results have been choppy. Additionally, we reported roughly 10 million of adverse development. The primary driver of development continues to be increased demand notices in uninsured motors and bodily injury as attorney involvement has increased over the prior year. Preferred Home and Other reported an underlying combined ratio of 78 percent in the quarter and 80 percent for the year. This improvement from the fourth quarter and full year 2019 of 83 percent and 85 percent respectively. Results this quarter also benefited from a reduction in expected losses from wildfires that occurred in the third quarter. Overall, for the preferred segment, we expect continued profit improvement actions taken through underwriting, pricing, and exposure management to bring us closer to our desired results. I'll now turn the call back to Joe. Thank you, Dwayne. Turning to our life and health segment on page 14, we're pleased to report that the segment was able to remain profitable while observing the protracted PNC catastrophe-like pandemic. Segment income was $9 million in the quarter and $60 million for the year. which is suppressed by increased COVID-related mortality. Our mortality experience remains largely in line with countrywide trends. Despite shutting off life new business sales for a handful of months this spring in response to the pandemic, we were able to grow overall life insurance premium. This is further evidence of the strength of our value proposition. While we have received positive COVID-related news in recent weeks with the rollout of vaccines, the situation remains dynamic with the timing of improvement difficult to predict with accuracy. We believe elevated pandemic-related benefit costs will continue during 2021. We also expect it will remain in line with nationwide mortality. Long-term, our outlook for the life and health business remains positive. Overall, Kemper has delivered a strong year. Our portfolio of specialty businesses produced sustainable earnings while delivering attractively priced products to our customers. We continue to build on our competitive advantages and core capabilities. This will allow us to continue solid top-line growth We believe this will also drive consistent book value growth and shareholder returns over the long term while maintaining our superior risk profile. I would now like to turn the call back to the operator to take your questions.