Kemper Corporation

Good afternoon, ladies and gentlemen, and welcome to KEMPER's second quarter 2025 earnings conference call. My name is Konstantin, 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 our host for today's conference call, Michael Marinaccio, KEMPR's Vice President of Corporate Development and Investor Relations. Mr. Marinaccio, you may begin.

Thank you. Good afternoon, everyone, and welcome to KEMPR's discussion of our second quarter 2025 results. This afternoon, you'll hear from Joe Locker, KEMPR's President and Chief Executive Officer, Brad Camden, Kemper's Executive Vice President and Chief Financial Officer, and Matt Hunton, Kemper's Executive Vice President and President of Kemper Auto. We'll make a few opening remarks to provide context around our second quarter results, followed by a Q&A session. During the interactive portion of the call, our presenters will be joined by Chris Flint, Kemper's Executive Vice President and President of Kemper Life, Duane Sanders, Kemper's Executive Vice President and Chief Claims Officer for P&C, and John Buscelli, Kemper's Executive Vice President and Chief Investment Officer. After the markets closed today, we issued our earnings release, filed our Form 10-Q with the SEC, and published our earnings presentation and financial supplement. You can find these documents in the investor section of our website, Kemper.com. Our discussion today may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation and Reform Act of 1995. These statements include, but are not limited to, the company's outlook on its future results of operation and financial conditions. Our actual future results and financial conditions may differ materially from these statements. For information on additional risks that may impact these forward-looking statements, please refer to our 2024 Form 10-K and our second 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've defined and reconciled all non-GAAP financial measures to GAAP, where required in accordance with SEC rules. You can find each of these documents in the investor section of our website, Kemper.com. All comparative references will be to the corresponding 2024 period, unless otherwise stated. I will now turn the call over to Joe.

Thank you, Michael. Good afternoon, everyone, and thank you for joining us today. I'm pleased to report that we delivered another quarter of strong underlying operating results. This was led by our specialty auto business, which once again produced a solid underlying combined ratio and meaningful year-over-year PIF growth. Before we dig into the specifics of our results, I'd like to provide some context around the overall auto market competitiveness, and more specifically, the specialty auto segment. I believe we're all aware that there's been a hard market for auto in general. Over the first half of this year, there's been clear evidence that markets are softening and reverting to more normalized conditions. As most carriers see combined ratios recovering to more acceptable profitability levels, they're not taking major rate increases. In some cases, they're decreasing rates and increasing underwriting appetites to more aggressively compete for new business. The result is a combination of reduced consumer shopping and more available options when they do shop. Accordingly, the high levels of growth seen by the strongest players are naturally normalizing to more traditional levels. Most of us in the industry think and talk about hard, normal, and soft market conditions. These descriptions work overall for commercial lines as well as the standard and preferred personal auto market, but they don't really work for the specialty auto segment. As I stated in the past, within specialty auto, you generally see either a hard market or a more normalized market. Overall, we don't typically experience a traditional soft market because of our segment's unique characteristics. First, there are many smaller competitors who only operate in a few local geographies. Second, the speed of loss development is typically faster than the standard market. And third, customer policy lifetime tenures are much shorter than the standard market. The combination of these characteristics has several implications. You can't recover short-term irrational pricing over the lifetime of a customer, aggressive pricing is seen in results more rapidly, and no single competitor can typically soften the overall market with irrationally aggressive activity. In specialty auto, we may experience short-term softness in select geographies, But in general, it does not last long or impact the overall market. Recall our competitive advantages. We deliver a low-cost value proposition tailored to our unique customer needs. We bring a distinct scale advantage and a deep understanding of our market. This enables us to deliver leading differentiated product sophistication, claims effectiveness, and ease of use. We are confident that our competitive advantages will continue to produce attractive long-term profitable growth in a more normal market environment. With this as a backdrop, let's move to page four and jump into this quarter's financial results. We delivered a return on adjusted equity of 15%, adjusted book value per share growth of 14% year over year, and an all-time high trailing 12-month operating cash flow of nearly $600 million. Our core businesses continue to perform very well. Specialty auto generated a 93.5% underlying combined ratio while producing 8% year-over-year PIF growth and earned premium growth of 17%. Our private passenger auto business produced an underlying combined ratio and year-over-year growth better than long-term norms but with somewhat off the hard market highs. Our commercial auto business continued to perform well and produced an underlying combined ratio of 90% while growing PIF by 18%. Here we reported adverse prior year development of approximately $19 million, which was driven by the general effect of social inflation. When viewed over a rolling four or eight quarter basis, this business consistently produces attractive combined ratios and growth and is a source of continued reliable strength. The performance of our alternative investments negatively impacted both our specialty auto and life segments. This quarter, we had some modest noise, which I generally categorize as consistent with the broad marketplace investments volatility. We continue to maintain a high-quality investment portfolio. Brad will get into the specifics around this shortly. The business fundamentals underlying our life segment remain stable. The business continued to produce a strong return on capital and distributable cash flows. Lastly, We continue to execute on our multi-quarter balance sheet strengthening. Last quarter, we retired $450 million in debt, bringing our debt to cap ratio near our long-term target, and our cash flow from operations hit an all-time high. With a strong balance sheet and healthy liquidity, we've repurchased $80 million of common stock since April 1st. Given our expectations around future growth and strong operating metrics, The board approved an additional $500 million of repurchase authorization, bringing the total available to $550 million. Brad will discuss our financials and share repurchases in more detail. Overall, we're pleased with our second quarter results. With that, I'll turn the call over to Brad. Thank you, Joe, and good afternoon to everyone. I'll begin with our financial results on page five. For the quarter, we reported net income of $72.6 million, or $1.12 per diluted share, and adjusted consolidated net operating income of $84.1 million, or $1.30 per dilute share. These results led to an attractive return on adjusted equity of 14.9%, and growth in adjusted book value per share of 14.3% year-over-year. As Joe discussed, our businesses continue to deliver strong underlying performance. Specialty auto produced strong growth in policies in force and earned premium, and life continued to provide steady returns. Overall, our core businesses are performing well. but this quarter our results were impacted by a few infrequent items. First, specialty auto recorded $14 million in adverse prior year development driven by a $19 million reserve increase in our commercial vehicle business. This was primarily related to bodily injury losses. Second, volatility in our alternative investment portfolio pressured net investment income. Let's turn to page six to discuss the investment portfolio in more detail. Quarterly net investment income totaled $96 million, coming in below expectations due to lower returns from alternative investments. Not surprisingly, performance in this asset class can be volatile. Valuation gains tend to align with marketplace deal activity, which slowed in the second quarter amid broader macroeconomic pressures. As market conditions stabilize, we expect alternative investment performance to improve in the coming quarters. The core portfolio, which excludes alternatives, continues to perform well, delivering $98 million of net investment income this quarter. Overall, we continue to maintain a high-quality, well-diversified investment portfolio. As the investment portfolio grows and with favorable new money rates, we anticipate net investment income to rebound in the second half of the year, averaging approximately $100 to $105 million per quarter. Moving to page seven, here we highlight the strengths of our balance sheet and significant financial flexibility. We maintain $1.1 billion in available liquidity and continue to have well-capitalized insurance subsidiaries. Our debt-to-capital ratio stands at 22.7%, aligning closely with our long-term target. Notably, we generated $587 million in operating cash flow over the past year, marking an all-time high for the company. Given our strong financial position, let me remind you of our capital deployment priorities. First, we utilize capital to support organic growth. Next, we will fund inorganic opportunities that enhance our platform. And lastly, we will return excess capital to shareholders. As Joe discussed earlier, the specialty auto segment is transitioning to a more normal marketplace with attractive but somewhat slower profitable growth opportunities. This evolving environment will require less capital to fund organic growth. With significant financial strength and flexibility and the belief our stock is trading below intrinsic value, We repurchased 80 million in common stock since April 1st, leaving 50 million available under our current authorization. This week, the board approved an additional 500 million share repurchase authorization, bringing the total amount for repurchase to 550 million. This will enable us to deliver on our capital priorities in this environment. That said, we have no preset timeline for share repurchases and plan to execute on them opportunistically. Finally, I want to reiterate that we're well-positioned for sustained profitable growth. The strategic investments we've made over the past five years have strengthened our capabilities and reinforced our confidence in providing shareholder value. I'll now turn the call over to Matt to discuss the specialty P&C segment.

Thank you, Brad, and good afternoon, everyone. Turning to page eight, our specialty P&C segment produced another quarter of quality underlying results. This business generated a solid underlying combined ratio of 93.6%, up modestly from the first quarter, largely driven by normal seasonal patterns. Private passenger auto produced a 94.5%, while commercial a 90.1%. Overall PIF growth for the specialty business was nearly 8% year over year. Directing our focus to private passenger auto. As Joe mentioned, the hard market in the specialty auto business has been receding, and we are moving to an overall more normal competitive environment. As you would expect, each state is moving at its own pace. California remains a modestly hard market, Given its unique regulatory environment and the challenges that exist in other lines of business, we do not expect California auto to move to a fully soft market. The marketplace is structured in a way that doesn't try sustained irrational behavior. We are, however, seeing competitors increasingly reopen. Our products are well positioned, and our scale and understanding of this unique state are enabling continued profitable growth. Florida continues to be a very competitive market. When we talked in May, we commented on some aggressive competitor actions and our plans to respond. That response came in June and had the intended positive impacts of increasing new business. We saw the benefits in June, and they continued through July. We will continue to build on this momentum to drive profitable growth. In Texas, the market conditions continue to operate in a traditionally normal fashion, on a relative basis sitting somewhere between California and Florida. Our production has been steadily gaining momentum since we fine-tuned our pricing plans earlier this year. All other states continue to see attractive growth and profitability in normalizing market conditions. Overall, we recognize the ongoing market dynamics and are proactively positioning ourselves for long-term profitable growth. Shifting to commercial auto. This business, again, saw very strong underlying profitability with PIF growth of nearly 18%. The market backdrop remains consistent and success in this line requires a deep understanding of underwriting dynamics. Our long-term competitive advantages continue to position us well to capitalize here. We are confident in our ability to profitably grow this business. Again, overall, we are positioning ourselves to compete in a more normalized market environment. That said, as a reminder, specialty auto has a more pronounced seasonal shopping pattern than standard auto. Customer shopping activity decreases in the second half of the year, particularly in the fourth quarter. This is normal, and we anticipate that it will occur this year. With that said, the business is delivering solid, profitable growth enabled by our competitive advantages, scale, and focus. We're in a position of strength and remain optimistic in our long-term outlook. I'll now turn the call back to Joe to cover the life business and closing comments.

Thank you, Matt. Turning to our life business on page nine, as noted earlier, the underlying business continued to generate stable operating results. Mortality and persistency remained in line with historical trends, and the life business continues to generate strong return on capital and distributable cash flows. Turning to page 10, in closing, I'd like to reiterate our highlights for the quarter. First, Kemper delivered solid operating results with an adjusted ROE of 15% and year-over-year adjusted book value per share growth of 14%. Specialty Auto continued to produce strong underlying results, with solid year-over-year PIF growth and an underlying combined ratio of 93.6. Our competitive advantages continue to give us confidence in our ability to navigate the normalization of the auto market. And finally, our capital and liquidity position provides significant financial flexibility. Our debt-to-cap ratio is near our long-term target range. Operating cash flows hit an all-time high. We repurchased $80 million of stock since April 1st. and now have the authorization to repurchase up to another $550 million. I want to take a moment to thank our entire Kemper team for their efforts. These results would not be possible without their commitment and hard work towards achieving our goals. We remain confident in our ability to create long-term shareholder value. With that, operator, we may now take questions.

Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star followed by the number one on your touchstone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please make sure to lift your handset before pressing any keys. One moment while we prepare the Q&A roster. Your first question comes from the line of Andrew Kligerman from T.D. Cowan. Please go ahead.

Hey, good afternoon. So the first question is around PIF growth and pricing, kind of a dual question. With written premium up 7% and PIF up 8% year over year, the question is, one, does that imply pricing came down and could you give color on that? And two, PIF is actually down 70 basis points sequentially. Are you kind of putting the brakes on things a little bit as we move into the second half?

Sure, Andrew. This is Joe. I'll take those. A couple of different things. Let's break them apart. The PIF versus written premium difference is really modest issues around geographic mix. um it's no no significant material change um in any in any premium rate filings there's modest changes in certain geographies but no no significant change view that as more of an anomaly second we've continued we've historically talked to you guys about year-over-year pif growth and encourage you not to be looking at sequential quarter because there's such seasonality differences in specialty auto We specifically pointed you to sequential quarter PIF when we were going from declining to growing so that you would see that as a leading indicator of a material change, not a sort of rolling four quarter. We are past that. We mentioned that last quarter. If you spend your time looking at sequential quarter PIF growth, you're going to get tied up in seasonality issues. Matt made a couple comments on that. The back half of the year in specialty auto, has a significant seasonality difference to the first half of the year. That's normal. That's happened for the last 20 years. We expect it to continue to happen. It will occur. It's got nothing to do with us putting on the brakes. We're not putting on the brakes. We're still happy, open for business, and anticipate that we're going to be a profitably growing business. What you're seeing in PIF is exactly what most of our competitors have been talking about. We've been shifting as an industry from a hard market to a more normal market. The double-digit growth that folks experienced in the last year or year and a half are not long-term normal environments. They're an anomaly of a hard market. I think Progressive had a call this morning and very aggressively reminded everybody of that. And we're competing in the same markets. Carriers are opening again. They're active. And that will cause that outsized growth to normalize. What we expect to see is what we've described long term to the investor community, that in a normal specialty auto environment, we expect to see, you know, low to mid single digit growth on year over year basis. That's somewhere in a three to seven percent range, depending on sort of where we are in any given area. you know, in any given 90-day period. And we would expect that as a good modeling view long-term from a PIF perspective. We would expect maintenance rate largely to be continuing to work its way through the system. And we would expect, as we've said, combined ratios over a number of quarters will migrate their way back into that 93.5 to 94.5, 95 range, which was where they've been in the long term. As, again, a reminder, if we were thinking pre-pandemic, 17, 18, 19, 20, a 93.5% and an 8% PIF growth, we all have been doing a happy dance. It's an attractive set of numbers for a long-term normal market. It just looks a little off compared to exceptionally high numbers. which we've pointed out to folks is not going to continue. And not because we didn't want it to, because the market will normalize and competitors will work their way in. So it's in no way, shape, or form us tapping brakes or intending to slow down.

That was super helpful, Joe. And then just my follow-up is around your confidence in the loss results going forward. So private passenger auto at 94.4 calendar year, is getting close to that 95. Do you think you could hold it there? And then with the 19 million-ish charge in commercial auto, are you confident that you've kind of nipped it and we won't see much, if anything, there going forward? Thank you.

Sure. I'm going to break those apart into two distinct buckets. The general combined ratio guidance we give of maybe a 93.5, 95 normal range, If it peaks above 95, we don't start getting an enormous angst for a quarter or two. We've got really an aggressive hard stop in a 96. There's normally in this business 50, 70 basis points on any given quarter that can move around. I'd expect this to be in that range and in that zone and don't have a particular angst around one quarter being at the edge of that. It will sort of stay in that zone, and I would expect it to be there. The second piece is around the 19 million that we talked about largely in commercial vehicle. We saw a modest uptick in a range of accident years, probably driven by what we collectively as an industry have described as social inflation. We made some balance sheet adjustments for that. It was an abnormally active quarter. We made some adjustments as a result of that. And that includes our current accident year pick in both CV and private passenger auto to reflect that environment. So that may have been, you know, if you think about the combined ratio in private passenger auto, a little bit of normal seasonality in the second quarter. That's normal to see it up a bit. And a bit of us pushing that current accident year up a bit to take into account that environmental issue. We believe we've got it right there. Could there be a little bit more noise in any given quarter? Yeah, maybe. But what we tried to discuss and tried to comment on in commercial vehicle is it seems like every four, six, eight quarters, you get one or two in there that has a little bit of a pop. If you look at it on a rolling four to eight quarter basis, that's a very attractive business for us. We have a high degree of comfort in it and we respond quickly. if we get a little bit of anomalous noise in a quarter appropriately, but it doesn't change our fundamental positive view on the outlook of that business.

Very helpful. Thank you.

The next question comes from the line of Mitch Rubin from Raymond James. Please go ahead.

Hey, thank you guys for taking my call. This is Mitch. I'm on behalf of Greg Peters. So I wanted to ask about the higher minimum limits in California, and I was wondering if you could quantify the impact on premiums this quarter. Thank you.

Sure. The minimum limits in California, that would have had, and I apologize, and we're trying to get you the exact number, would have had roughly the same impact you would have seen in the first quarter. Um, for that and our policies are running six month policies so that, that largely its impact will have worked its way through the book. Um, this is the last quarter that anomaly will have occurred. I'm in that and I apologize, Mitch, we're gonna have to get back to you on the specific number on that. I I'm thinking I've got it at the top of my head, but I'm certain I'm going to be off on a little bit. Let us get back to you. Um, it's consistent with what we saw in the first quarter and given our policies are virtually a hundred percent six months in California. It's worked its way through.

All right. Thank you for the cover on that. My follow-up is on retention and how that's been differing by state. Yeah, Matt, why don't you go ahead and take a shot at that.

Yeah, Mitch, you know, the texture varies a bit by state. Some of the commentary we left with, we started with earlier on California market, It continues to be relatively hard basis we're seeing limited supply relative historical trends there so retention generally is holding. In that marketplace, you know Florida is we're seeing a modest maybe a modest decline in policy life expectancy and that's that's normal as agents are reshopping books as carrier premiums are. are shifting down but it's it's not moving materially and changing our perspectives on that state texas is is pretty stable we are seeing um you know less shopping in the marketplace uh more recently so we're you know likely that will that will abate a bit as uh as you know the the business sort of rolls forward but retention overall is is has been pretty stable thank you for the answers

Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star followed by the number one on your touchstone phone. If you're using a speakerphone, please make sure to lift your handset before pressing any keys. The next question is from the line of Paul and Newsome from Piper Sandler. Please go ahead.

Good afternoon. One may follow up on the adverse development. Was there anything besides just severity going up that like, was there any geographic pattern to it? Was there anything just purely liability related things or was there some healthcare inflation in there? I think you said bodily injury. Just want to make sure we got all the pieces there on the adverse development.

Sure. Paul, this is Brad. Great question. You know, specifically in CV, where we're seeing the adverse development, it was in our large loss bucket, which is a very low frequency, higher severity coverage or loss bucket. It's important to articulate those items because it's not an underwriting issue. There's no significant increase in frequency. It's simply a result of social inflation over time. And these things tend to be two or three years old as they develop. And in the more recent accident years, we strengthened the balance sheet as a result of that. So, you know, the business overall continues to perform extremely well, grew significantly year over year, and an underlying combined ratio in the low 90s, very strong overall. Just more episodic, large loss events, and as Joe said, more litigation activity in the second quarter than we've seen in the past.

And then a related question, and a big picture question, really to the combined ratio plots that you've had over the cycle. We're kind of in the zone for a normal underlying profitability. And I think we're sort of in the zone from a debt to capital perspective. Are there pieces there that would suggest that maybe this is sort of essentially in the zone for return on equity as well? Or is there some possibility for... improved ROE over the cycle?

Yeah, you know, there's always some variation in there, Paul. We look at our adjusted ROE because there's a significant amount of goodwill on the balance sheet at being roughly 15%. You know, that's a reasonably attractive spot. I think it can and can and has over time moved up a bit. And I think it's in a reasonable zone with some expected volatility there. The other thing it points you to, and maybe you were going to ask about it next, and I may jump in the gun, but there's a significant share repurchase authorization that came out with the board. I think it's actually at $500 million, it's equal to the last two reauthorizations or authorizations combined. It amounts to... when you include the 50 million remaining and the 80 million we bought in the last 90 days, roughly 16% of the current market cap of the company. So it's a fairly significant opportunity there. We believe the returns are good in this business. We have a healthy balance sheet, a healthy liquidity. I think the stock's somewhat undervalued and we're going to opportunistically buy and aggressively defended in the marketplace because we think there's sort of an unrecognized upside there.

Thank you. Appreciate the help.

Thank you. There are no further questions at this time. I'd like to turn the call over to Joe Locker for closing comments. Sir, please go ahead.

Thank you again for everybody for your time and your attention. We look forward to talking to you next quarter and look forward to continue to be strong, thoughtful competitors in the marketplace.

Ladies and gentlemen, this concludes Ray's conference call. Thank you very much for your participation. You may now disconnect.