Kemper Corporation

Good afternoon, ladies and gentlemen, and welcome to the Kemper's fourth quarter 2021 earnings conference call. My name is Tania, and I will be your operator for today's call. At this time, all participants are in a 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, Karen Guerra, Kemper's vice president of investor relations. Ms. Guerra, you may begin.

Thank you, operator. Good afternoon, everyone, and welcome to Kemper's discussion of our fourth quarter and full year 2021 results. This afternoon, we'll hear from Joe Locker, Kemper's president, chief executive officer and chairman, Jim McKinney, Kemper's executive vice president and chief financial officer, 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 results and then open the call for a Q&A session. During the interactive portion of our call, our presenters will be joined by John Buscelli, Kemper's Executive Vice President and Chief Investment Officer, Eric Sternberg, Kemper's Executive Vice President and Life and Health Division President. 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 on or about February 10th. 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. Our actual future results and financial conditions 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 2020 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 earnings 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 these documents on the investors section of our website, Kempfer.com. All comparative references will be to the corresponding 2020 period unless otherwise stated. I will now turn the call over to Joe.

Thank you, Karen. Good afternoon, everyone, and thank you for joining us. Earlier today, we reported our fourth quarter and full year results. Goes without saying, we were disappointed with our profitability. The pandemic-driven environmental challenges we've discussed in the last couple of quarters not only remain, but have intensified. These challenges have impacted each of our businesses. In P&C, last quarter, we discussed the relationship between earned rate and loss severity. We talked about the fact that loss inflation is immediately incurred and negatively impacts results. Rate increases are subject to regulatory approvals, roll on to policies of renewal, and are earned over the life of the policy. The benefit of those increases is therefore delayed. The suspension of rate increases during the pandemic and the inflation surge that came with reopening the economy has created an historic mismatch between policy costs and pricing. In the fourth quarter, we continue to see increases in inflation-driven loss severity. Labor rates, auto body repairs, and rental car rates all continue to rise due to inflationary trends related to supply chain issues and labor shortage. As an example, In 2021, used car prices were up 51% from 2019 and 37% over 2020. In the last quarter alone, they were up 9%. These increases in costs have a direct and immediate impact on our margins and did not moderate. To respond to this environment, during the quarter, we made significant progress on both rate and non-rate profit improvement. Overall, we exceeded our targets for the number of rate filings submitted, the percentage of our book impacted, and the level of rate increases approved. These actions will favorably impact future results. We see this aggregate inflation rate imbalance continuing in the short term. Due to the actions we have taken and will continue to take, we believe the situation will stabilize and ultimately restore margins to appropriate levels. progress will initially be gradual, then more rapid as earned rate benefits are fully realized. The life and health segment continues to be negatively impacted by the pandemic. In the quarter, the business continued to incur excess mortality. Throughout the initial waves, then the Delta variant, and now Omicron, our excess mortality rates have remained largely in line with national trends. In summary, We close the year making significant progress that will become increasingly visible in our results. We are actively taking rate and non-rate actions to restore our margins and are working to accelerate this process every way possible. Duane will discuss more shortly. Unfortunately, the most significant improvement levers will take time. It's a little like planting tomatoes after the winter. You can't start until after it warms up, and it's going to take 80 days before you can eat the fruit. There's no way to get the fruit faster. We couldn't take rate until frequency rebounded from the lockdown. Once filed, rate takes time to bear fruit. There isn't a way to meaningfully accelerate it. Though it will take time, we are confident our actions will be successful and position us for growth. I'll now turn the call over to Jim to discuss our operating results in more detail. Thank you, Joe. Let's turn to page four. For the quarter, we generated a net loss of $106 million, or $1.66 per share, as reported, and $101 million, or $1.59 per share, as adjusted for acquisitions. We also produced an adjusted consolidated net operating loss of $131 million, or $2.05 per share, as reported, and $126 million, or $1.98 per share, as adjusted. Earned premium increased 12% on a reported basis and 5% after adjusting for the AAC acquisition. The net loss for the quarter was primarily driven by environmental headwinds that impacted loss costs throughout our P&C businesses. Our focus has been and will remain on restoring comfort to target profitability. During the third and fourth quarter combined, the P&C teams filed for approximately 11 points of rate on 56% of our personal auto books. Further, the team executed a number of underwriting and non-rate actions to improve margins. Duane will provide greater detail on this topic later. Turning to page five, return on tangible equity, excluding unrealized gains, was negative 4.9 percent. This is below our targeted long-run return. Excluding unrealized gains, tangible book value per share declined $7.21 compared to last December. Of this change, $3.11 is related to the acquisition of American Access and the corresponding goodwill the transaction created. The corrective actions we have taken and are taking in response to higher loss-cost trends will over time enable us to achieve our historical value creation levels. On page six, we highlight our view of operating income that continue to be negatively impacted by environmental challenges. As mentioned earlier, this quarter we witnessed higher severity leading to our specialty P&C segment reporting an as-adjusted underlying combined ratio of 119%. In addition, In our life and health segment, we continue to experience elevated life benefit costs due to excess COVID-related mortality and increased persistency. On page seven, we review some of the key capital metrics we use to track our performance, including growth in tangible book value per share and tangible return on equity. For the last few quarters, we have been below target. We believe these challenges to be short-term in nature and do not expect them to impact our long-run targets. Recent performance is a direct result of the environmental challenges impacting the industry. While this is disappointing, we've instituted and will continue to institute corrective measures to restore the business to target profitability. On page 8, we highlight the strength of our balance sheet. Our substantial capital and liquidity positions enable us to navigate and optimize within the current environment. We continue to produce strong cash flow, generating over $350 million for the year. This has enabled us to continue to make investments in our business and optimize our geographic footprint for the long-term profitable growth. Our insurance entities are well capitalized. Liquidity remains strong and our debt to capital ratio of 21.9% remains within our target range. Moving to page nine. We provide an overview of the highlights to our multi-year excess of loss reinsurance and our annual aggregate catastrophe programs. Each year, We review our programs to align with our risk appetite and to minimize our cost of capital. For 2022, we purchased an additional $75 million in limits in our excess of loss program due to our specialty auto growth. Our program will cover losses at 95% of $300 million and excess of $50 million. In addition, we renewed our catastrophe aggregate program with a $5 million increase in the retention level. This program is intended to reduce earnings volatility from high frequency, low severity events. increased limits and the corresponding costs were offset by savings on the cat ag program thus there was minimal impact to our year-over-year costs turning to page 10 net investment income for the quarter was 108 million our portfolio construction is designed to match liabilities and provide stable income through various cycles this quarter we generated a pre-tax equivalent yield of 4.6 percent in closing The company's quarterly financial performance continues to be pressured by various environmental factors. We are confident that the corrective actions we have taken and are taking will, over time, return us to our financial targets. With that, I'll now turn the call over to Duane, who will provide details on our P&C segments. Thank you, Jim, and good afternoon, everyone. Let's turn to page 11. Last quarter, we introduced this slide to help illustrate the working dynamics we are navigating. At the onset of the pandemic, miles driven and accident frequency were historically low. During this time, Kemper had effectively no rate increases, and additionally, along with most major carriers, delivered premium rebates to customers. As we emerged from lockdowns, we saw a lost trend shoot up against pre-pandemic unchanged rates. These dynamics will continue to put pressure on margins in 2022, as the written rate translates to earned rate later in the year. This illustration is intended to bring clarity and context to the profit restoration journey. As the diagram highlights, the inflationary and rate curves create several potential paths and timelines to get there. Moving to page 12, we'll begin with the specialty P&C. Against the challenging backdrop of inflationary trends related to labor shortages and supply chain issues, along with frequency reaching pre-pandemic levels. The segment experienced an underlying combined loss ratio year-over-year increase of 28 points, a sequential quarter increase of 11 points. Despite this quarter's loss and temporary rate imbalance, our view of long-term profitability of the business remains highly favorable. The chart on the upper right shows the progress made in obtaining rates throughout the year. including an approximate timeline on how actions will earn through our business. For example, during the fourth quarter, we filed for approximately 8% rate on roughly 57% of our book, with much of the 2021 rate already effective. We're in the process of filing for an additional 7% on 60% of our specialty book in the first quarter. Understandably, it takes time for filed and effective rate to be written and earned into our results. We expect the majority of the filed rates in 2021 to be earned in 2022 with the most significant earned impact in the second half of the year. Now let's turn to page 13. The preferred P&C segment continues to face similar challenges. Looking at the chart on the upper right, we filed for approximately 12% rate on roughly 23% of our preferred auto book during the fourth quarter. We're in the process of filing for an additional 10% on 17% of our book in the first quarter. In summary, the organization is focused on the most important levers to restoring profitability. I'll now turn the call back to Joe. Thank you, Dwayne. As we turn to our life and health segment on page 14, we highlight that life earned premium increased 5% due to persistency improvements. The face value of enforced policies continues to increase driven by higher persistency in new business sales. We also observed and are encouraged by strong consumer demand for our products. Lastly, our mortality results remain in line with countrywide trends. As the mortality impacts of COVID subside, life mortality and benefit costs should revert to more normalized levels. In closing, although we're disappointed in this quarter's financial results, I couldn't be prouder of our team and how our organization has responded to the circumstances and challenges of the last couple of years. We remain focused on managing through these circumstances, returning to target profitability, and expanding on our long-term competitive advantages. I'll now turn the call over to the operator for questions.