Kemper Corporation (NYSE:KMPR) Q4 2023 Earnings Call Transcript

Kemper Corporation (NYSE:KMPR) Q4 2023 Earnings Call Transcript February 1, 2024

Kemper Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen, and welcome to Kemper’s Fourth Quarter 2023 Earnings Conference Call. My name is Ludi, and I will be your coordinator today. 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 conference call, Karen Guerra, Kemper’s Vice President of Investor Relations. Ms. Guerra, you may begin.

Karen Guerra: Thank you, operator. Good afternoon, everyone, and welcome to Kemper’s discussion of our fourth quarter 2023 results. This afternoon, you’ll hear from Joe Lacher, Kemper’s President and Chief Executive Officer and Chairman; Brad Camden, Kemper’s Senior Vice President and Interim 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 fourth quarter results followed by a Q&A session. During the interactive portion of our call, our presenters will be joined by Duane Sanders, Kemper’s Executive Vice President and President of the P&C division, John Boschelli, Kemper’s Executive Vice President and Chief Investment Officer, and Chris Flint, Kemper’s Executive Vice President and President of Kemper Life.

After the markets closed today, we issued our earnings release and published our earnings presentation and financial supplement. We expect to file our Form 10-K with the SEC within the next week. 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 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 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 2020 Form10-K and 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’ve defined and reconciled all non-GAAP financial measures to GAAP where required in accordance with the 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 2022 period unless otherwise stated. I will now turn the call over to Joe.

Joseph Lacher: Thank you, Karen. Good afternoon, and thank you for joining us today. We are obviously going to spend time on our quarterly results on the call, but before we jump in, I want to make some comments about the overall environment. Number of quarters ago, we referenced a slide that looked at rate and loss trend over time. It showed a pre-pandemic period where rate and loss inflation were in balance, an early pandemic period where rate increases dropped to zero with loss inflation negative, driven by lower frequency from less driving and a recovery period were earned rate lagged [inflation], profitability was pressured and significant underwriting and non-rate actions were needed to combat the lag and earned rate impact.

We are exiting this recovery phase now. Cumulative earned rate increases have exceeded cumulative loss inflation and underwriting profitability has been reliably restored. We are now moving into the next phase in this journey from recovery to a rebalancing phase. This period will be characterized by three key items. One, rate increases will continue, but will largely matched to inflation, back to maintenance rate changes, if you will. Two, the significant underwriting and non-rate actions implemented during the recovery phase will thoughtfully be removed. Recall that these actions were taken to improve profitability when rate changes were lagging. As residual rate increases earn in, non-rate actions will be reversed, effectively trading their impacts.

And three, the components of PIF growth. New business and retention will be rebalanced to more traditional levels. We are excited to be shifting to this next phase. We expect this rebalancing period will run several quarters. I’m sure we’ll talk more about it today and in the future. Our Life business has already moved through both the recovery and rebalancing phases. We continue to expect consistent earnings and distributable cash flow from this business. Now let’s shift to our quarterly performance. We are going to communicate a few key points that I’ll group into three topics. First, as previously communicated, our priority has been to restore profitability, and we’ve done that. This quarter, it’s clear that our cumulative actions have been effective at offsetting the elevated severity we’ve experienced in the last several years.

The benefits from the actions taken have generated improvements in our Specialty P&C underlying combined ratio for three consecutive quarters, and we’ve reached the important milestone of returning our Specialty P&C business to an underwriting profit. Results to date in combination with significant approved, but unearned rate make us highly confident in achieving target margins in 2024. Second, we continue to advance our differentiated capabilities through a number of strategic initiatives. During the pandemic recovery phase, I mentioned that we’d focus on home improvement projects. Initiatives that would both enable us to navigate that challenging time and strengthen our competitive advantages going forward. These operating model enhancements have been successful and positioned the company for long-term profitable growth.

We completed two major initiatives this quarter. Our Bermuda Optimization and our cost reduction program, both exceeded projected benefits. We remain focused on further strengthening our systematic sustainable competitive advantages by reducing our long-term risk, improving our capital and liquidity, and enhancing our ability to generate stable long-term distributable cash flow and earnings. And third, we are laser focused on success in this rebalancing period and beyond. Here, success will be defined by achieving and maintaining long-term profit margins and returning our business to healthy growth. We anticipate further progress on all aspects of this rebalancing over the coming year. Let’s move to Page 4 with details of the results. Specialty P&C generated a 98% underlying combined ratio, a material 10 point improvement over the last three quarters.

We’ve been making consistent progress and are pleased with the incremental 2.3 point benefit in the fourth quarter. As rate actions surpass loss trend, we plan to ease underwriting restrictions, including new business restrictions so we can pivot to restoring policy and premium growth. Expectations here should be consistent with what I described for this rebalancing phase. Maintenance rate increases to balance loss trends, earned rate impacts to continue progress to restore long-term margins and to permit reversal of non-rate actions, and lastly, an increase in new business to restore more normal long-term growth. Our priority going forward will be to briskly restore this balance of long-term profitable growth while positioning the company toward an enhanced valuation through the various strategic initiatives we introduced in November of 2022.

Reflecting on those initiatives, this quarter, we successfully completed and exceeded the goals related to the Bermuda optimization and the multi-year cost structure initiative. We remain on track with the execution of the Reciprocal Exchange project and the preferred P&C exit. Each of these home improvement projects increases our long-term competitive advantages and strengthens our financial position. And now I’ll turn the call over to Brad to provide you with additional color.

Bradley Camden: Thank you, Joe. I’ll begin on Page 5 with our consolidated financial results. As Joe highlighted, we had another sequential quarter of underlying improvement and generated both an operating underwriting profit. Our rate and non-rate actions taken combined with the completion of several strategic initiatives led to this positive outcome. We are excited to enter 2024 after achieving solid results and are intently focused on keeping the momentum and returning the specialty auto business to target margins. For the quarter, we had net income of $51 million or $0.80 per diluted share and adjusted consolidated net operating income of $51 million or $0.78 per diluted share. Additionally, I’d like to highlight that we had no prior year reserve development.

Net income included $15 million in realized investment gains partially offset by $14 million in restructuring and integration costs. The preferred P&C business reported below the line is non-core operations, generated a net income of $3 million, including approximately $6 million in catastrophe losses. Turning to Pages 6 and 7. We provide an update on our strategic initiatives, which we’ve grouped into two categories, completed and ongoing. Let’s start with the projects completed during the quarter. First, the Bermuda project we launched in 2022 enabled approximately $330 million in dividends to the parent in the quarter, exceeding our prior estimate of $250 million. This bolstered parent liquidity and strengthened our ecosystem. Next, related to our expense reduction efforts.

We exceeded our dollar targets and the pace in which we accomplished them. We achieved a multi-year target of $150 million expense savings in the program’s first year. After this quarter, we’ll no longer report on this initiative, but we’ll continue to further optimize our cost structure. This will allow us to preserve our low cost competitive advantages and set ourselves up for future growth and profit margin improvements. Moving to ongoing projects. The exit of the preferred P&C business is on track. During the second half of 2023, we freed up approximately $45 million of capital and anticipate freeing up an additional $130 million by the end of 2024 and another $100 million by the end of 2025. This capital will be redeployed in our core businesses and initiatives that meet or exceed our return targets.

And finally, as Joe mentioned, the reciprocal premium population is on track. Growth will initially be slow, but is expected to ramp up as we receive approval to expand into new states. We will provide details as we hit key milestones for this initiative. Turning to Page 8. Our insurance companies are well capitalized and have significant sources of liquidity. At the end of the quarter, liquidity increased by approximately $325 million to $1.1 billion consisting of revolver capacity, intercompany lending capacity and holding company cash and investments. Our healthy liquidity balance allows us to pay holding company dividends and interest payments and to support our operating subsidiaries as needed. Moving to Page 9. Net investment income for the quarter was $105 million and our pre-tax equivalent annualized book yield was 4.5%.

We continue to maintain a high quality investment portfolio that generates stable income to support our operating businesses and is aligned with our liabilities. I’ll now turn the call over to Matt to discuss the Specialty P&C business.

Matt Hunton: Thank you, Brad, and good afternoon, everyone. Moving to Page 10 in our Specialty P&C business. Let me start with some comments on the quarter for both PPA and CD, and then I’ll shift to overall comments going forward. For the segment, we close the fourth quarter with an underlying combined ratio improvement, 2.3 points sequentially and 9.8 points year-over-year as the cumulative benefit of our profit actions exceeded incremental loss trend. In the quarter, incremental earned rate continue to improve and severity trends remain stable, but elevated. The majority of the improvement as expected was driven by private passenger auto, as this line was the most challenged. I’m pleased that we generated an underwriting profit in the quarter.

Our commercial vehicle business remains a source of strength, producing an underlying combined ratio of 93.2%. We remain confident about our ability to generate long-term value in this area. Turning to production. Consistent with last quarter, we continue to observe hard market conditions, especially in California. As we renewed policies at higher rates, persistency remained in line with prior periods creating favorable premium retention. As Joe mentioned, a return to underwriting profitability is allowing us to shift our 2024 focus to what he described as the rebalancing phase. In anticipation of this shift, we selectively wrote a modest amount of incremental new business to test new customer cohort buying and claim behavior. It wasn’t a material amount for the quarter, but a good start towards re-expanding new business heading into 2024.

We have strong and differentiated tools and capabilities to compete in our market segment. Over the last few years, we’ve enhanced and continue to enhance these capabilities. Given this, we are confident in our ability to understand the performance of business sub-segments. This includes the impact of the easing of the underwriting restrictions put in place to improve profitability following the pandemic. As we look forward, our priorities will remain on first, achieving target margins and second, restoring growth in that order. We’ll execute with a thoughtful balance between underwriting profitability and new business writings as we look to optimize long-term profitable growth. I’ll now turn the call over to Joe to cover the Life business and closing comments.

Joseph Lacher: Thanks, Matt. Turning to our Life business on Page 11. Net operating income was $15 million for the fourth quarter. Despite the impact of persistent inflation on our target customers disposable income, consumer demand for our products remain consistent as life issued policies were up slightly and persistency was stable. You should note this quarter’s results include the annual actuarial assumption and reserve calculation updates required under the new accounting standard known as LDTI. As expected, these updates appear in multiple lines in the financial statements. In aggregate they favorably impacted our operating earnings for the quarter. Overall, the underlying Life business continues to generate consistent returns on capital and distributable cash flow.

Turning to Page 12. As we wrap up, let me reiterate our highlights for the quarter. We achieved both an operating and underwriting profit and generated sequential underlying results improvement for the third consecutive quarter. We expect to reach Specialty P&C target margins in 2024 and are shifting our focus to rebalancing long-term profitability and growth. Our strategic initiatives are working well and outperforming expectations. Together, they’re enhancing our financial profile, increasing our focus, and strengthening our organization. We enter the year with a robust financial foundation and a clear roadmap to restore return on equity of 10% or higher. We have a strong company with a team dedicated to delivering on our promises, which include providing attractive long-term intrinsic growth to our shareholders and value to all stakeholders.

In closing, we are pleased with the results for the quarter and our ability to achieve profitability. We remain optimistic as we look to 2024 and beyond. I’d like to thank our entire Kemper team for their ongoing dedication to executing on our priorities in 2023 and as we move into 2024. Operator, I’ll now turn it back to you so we can take questions.

Operator: Thank you. And ladies and gentlemen, we’ll now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Gregory Peters from Raymond James. Your line is open.

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Q&A Session

Gregory Peters: Good afternoon. I’m going to go back to the comments about rebalancing between restoring profitability and getting to your target margins and then rebalancing on getting back to traditional growth metrics. And I’m just curious how rebalancing getting back to traditional growth is going to look when you also have the rollout of the reciprocal ongoing. And does this mean that you’re only going to be growing in the reciprocal piece and not growing in the other piece? Or maybe you can provide some clarity around how these pieces are going to be moving around over the course of the year?

Joseph Lacher: Sure. Happy to, Greg. This is Joe, and I’ll take a shot at it and then Brad and Matt may add some pieces. The first thing I’d suggest to you is almost ignore the reciprocal in the thought process. There’s a couple of big things moving. We made an underwriting profit in the quarter. We’ve got significant unearned rate coming in, which has us highly confident we’ll hit our target margins and we will begin reversing some of the non-rate actions we took to improve profitability that will consume some of that unearned rate, some of those rate – those non-rate actions included tightening new business underwriting restrictions. So we will re-expand those to where they were, and that will allow us to put new business on, move back towards the process of growing and that rebalancing, if you will, is really the reversal of those items and going back to that more normal maintenance rate.

We’re going to start doing that across all geographies, all distribution lines, the entire ecosystem as briskly as reasonably possible. It won’t occur on a day, it won’t occur in a minute, but it will take a little bit of time and it’ll work its way through. Regardless of whether we’re dealing with it on Kemper paper or on the exchange or anything else, we’re going to do that. As a separate and distinct item, we are working on rolling out the reciprocal. That process will in and off itself go a little bit slower. What we have to do in those cases is get products filed and approved in individual states in the exchange entities or in its subsidiaries in order to move that new business in. We might in some cases use some reinsurance from where Kemper fronts moves in.

But really that will be a pace that’s more measured by the approvals on those individual states for that activity to occur and less a function of us restoring and rebalancing our underwriting criteria. So I think mentally you should think about them differently. That rebalancing can occur more briskly. You’ll see it occur over – significantly a bit over the first quarter and more significantly over the second quarter. The reciprocal population pace will be necessarily slower because of the regulatory nature of those approvals. Does that help?

Gregory Peters: Yes. That does. I guess correlated there is investor focus around where your policy count numbers settle out and start growing to and what the right base is. When you talk about the cost saving program, I assume that those are back office, those are not forward facing cost saves that you’ve deployed. In other words, what I’m getting at is you haven’t cut and you haven’t limited your opportunity to grow going forward by these cost savings.

Joseph Lacher: Correct. The cost savings, none of them were related to business acquisition, forward items and the like, all of them were more back office or infrastructure-related.

Gregory Peters: Okay. And then…

Joseph Lacher: They do not in any way shape or form impair our ability to write new business or to grow.

Gregory Peters: And the final question on just the policy count. How do you view California as your largest state and where you’ve got the substantial rate increase that was approved last year? How do you view your rate adequacy across the markets at this point in time? Because you did highlight there was some rate that you filed for additional rate that’s been filed. So just curious where you see your position relative to the market?

Joseph Lacher: So I’m going to make a broad comment that’s not precise. Broadly, we view our rates as adequate as we move to hit these margins. And that is a bit of a forward-looking view, recognizing the rate that is to be earned in. By nature, as you look at forward inflation, we’re going to go back to where we have maintenance rate. So if we file rate for that maintenance perspective, that means we think there’s an additional rate need we need to take it. That’s sort of an ordinary course. So there’s a perpetual, if you will, modest maintenance rate need that works its way through. When you go into individual cells and individual geographies, there’s always a combination of the rating factors, the local geography, the line mix, the underwriting mix where some things are more or less adequate.

And so there’s always some part of the rating cells that we don’t – we’re not satisfied with or some that we think, we’re more than satisfied with. So we’ve got a mix of those. I think there’s ample opportunity as we’ve restored our underwriting profitability and get that confidence of hitting target margins. There’s ample opportunity for us to re-expand our new business to get back to more traditional new business levels and more traditional growth levels over several quarters.

Gregory Peters: Okay. I appreciate the detail to help me frame PIF going forward. The last question, it relates just you said Specialty P&C target margins in 2024. Is that for the full-year? Is it by the end of the year? Do you have any sort of timing on that? That’s my last question. Thank you.