KEMPER Corp Q2 FY2021 Earnings Call

Thank you, Grant. Good afternoon, everyone, and welcome to Kemper's discussion of our second quarter 2021 results. This afternoon, you'll hear from Joe Lacher, Kemper's President, Chief Executive Officer and Chairman; Jim McKinney, Kemper's Executive Vice President and Chief Financial Officer; and Duane Sanders, Kemper's Executive Vice President and the President of the Property and Casualty Division. We'll start with a few opening remarks to provide context around our second quarter results and then we will open the call for questions. During this interactive portion of the call, our presenters will be joined by John Boschelli, Kemper's Executive Vice President and Chief Investment Officer; and Erich 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 second quarter earnings presentation, financial supplement, and Form 10-Q. You can find these documents on the Investors section of our website, kemper.com. Today's discussion may contain forward-looking statements as defined in 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 operating results and financial condition, as well as potential impacts related to the COVID-19 pandemic. Our actual future results and financial condition may differ significantly from these projections. For details on the potential risks of relying on forward-looking statements, please refer to our 2020 Form 10-K and our second quarter earnings release. This afternoon's discussion will also cover non-GAAP financial measures that we believe are relevant to investors. One such measure we are reintroducing is as adjusted for acquisition. It’s important to understand how the reported results, including the impact of the American Access acquisition, affect Kemper overall. Still, investors want to see the underlying organic performance of the combined businesses. Since our as-reported financials don’t include American Access's historical information prior to the acquisition’s closing, and our current results reflect the impact of purchase accounting, the underlying trends may not be immediately clear. To provide clarity on the underlying performance of the combined businesses, we also present our financials as adjusted for acquisition. This removes the effects of purchase accounting and incorporates historical American Access information for time periods before the acquisition, allowing for a meaningful year-over-year comparison. In our financial supplement, presentation, and earnings release, we have defined and reconciled all non-GAAP financial measures to GAAP as necessary in accordance with SEC rules. You can find all these documents in the Investors section of our website, kemper.com. All comparative references will be to the corresponding 2020 period unless stated otherwise. I will now turn the call over to Joe.

Thank you, Mike. Good afternoon, everyone, and thank you for joining us on today's call. This quarter, the country took a significant step forward in its recovery from the pandemic, and it's clear we're in the middle of a strong economic rebound. Last quarter, we indicated the reopening would create a very dynamic environment with expected increases in auto frequency and severity. Further, we anticipate decreasing mortality. The reopening is happening faster than projected. As a result, frequency in auto increased significantly and a supply chain that was already stressed, especially related to auto, was further pressured. Although we largely expect these effects, the speed of the reopening magnified their financial impact in this quarter's results. In our auto businesses, the increasing activity seen through an increase in miles driven led to elevated frequency. The environment also significantly increased severity, driven by supply chain issues, labor shortages, social inflation creeping into lower limit policies and Florida PIP court rulings that impact multiple policy years. Alternatively, in our Life business, we saw increased demand for our products, historically high persistency and a reduction of COVID-related mortality. Our balance sheet and business model remain well positioned to navigate the reopening. We're taking appropriate actions to ensure we meet the needs of our customers and continue to create long-term intrinsic value. For a few specifics on the quarter, please turn to Page four. We generated a net loss of $63 million or $0.97 per share as reported and $53 million or $0.82 per share as adjusted. We also produced an adjusted consolidated net operating loss of $99 million or $1.54 per diluted share as reported and $89 million or $1.39 per share as adjusted. As highlighted before, the speed of the reopening and other environmental challenges negatively impacted these results. Duane will discuss these issues in greater detail. Let's discuss the key metrics we use to evaluate our performance. Tangible book value per share, excluding unrealized gains, declined by 1%. The goodwill created from the American Access transaction contributed to the majority of this decline. Note, as we stated at acquisition announcement, we expect a relatively short earn back and remain enthusiastic about how the transaction will expand our specialty auto franchise value. Return on tangible equity, excluding unrealized gains, was 11%. In addition, we continue to produce strong cash flow. Over the past year, we generated $422 million of cash from operations. These metrics highlight how, even in a challenging environment, Kemper remains financially sound. Turning to segment results. The swift reopening and the referenced environmental challenges led to an increase in both frequency and severity this quarter. Further, these inflationary factors and the Florida PIP court rulings I mentioned earlier drove adverse prior year reserve development. As a result, the Specialty P and C segment generated an adjusted underwriting loss of $60 million and an as adjusted underlying combined ratio of 106%. We believe this to be a short-term obstacle that will extend a few quarters while we take appropriate corrective actions. We expect to return to a more normalized underlying combined ratio within the next few quarters. In April, we highlighted how the uneven reopening from state to state impacted shopping behavior. This quarter, we saw demand for our products return, and we experienced strong growth. Policies in force grew 5.5% as adjusted and direct written premium on a normalized basis grew 13.2%. The business remains well positioned for attractive long-term growth and through proactive corrective measures appropriate long-term returns. Our Preferred segment faced the same environmental challenges in our Specialty P and C segment; we continue to work to enhance this business. Turning to our Life and Health segment. We continue to experience strong policy retention and increased demand. The heightened level of mortality we experienced earlier in the pandemic is beginning to subside. The business is positioned for our ongoing profitable growth. On the capital deployment front, we continue to take actions that enhance the long-term intrinsic value of the company. We closed on our acquisition of American Access on April 1 and repurchased roughly $160 million worth of shares through the end of the quarter while maintaining a high level of financial flexibility. In summary, we experienced expected environmental challenges in auto this quarter. Their impact was magnified by the unanticipated rapid speed of reopening. On the flip side, our Life business has begun to return to a more normalized level of profitability. We have a strong balance sheet and a business model positioned to navigate the reopening and ensure we continue to deliver long-term value to our customers and investors. I'd now like to turn the call over to Jim to discuss our second quarter operating results in more detail.

Thank you, Joe. Turning to Page five. You can see the impact that the recent environmental challenges had on our business. In short, financially, it was a tough quarter. While top line growth returned to a more normalized rate, two years of increasing severity, additional supply chain challenges and a swift frequency return more than offset last year's premium credit and this year's mortality improvement. This resulted in a reported net loss of $63 million and adjusted loss of $53 million, a reported consolidated net operating loss of $99 million and an adjusted net loss of $89 million. It is likely to take a few quarters for the environment to normalize corrective actions to begin to earn in and profitability to return to appropriate levels. Turning to tangible book value per share. Excluding unrealized gains, tangible book value per share declined $0.30 compared to last June. Looking at this relative to last quarter, it declined $5.10. The primary driver was our investment in AAC and its corresponding goodwill that accounted for $3.7 of the change. We continue to expect this transaction to be accretive to franchise value. On Page six we highlight our view of operating income. As mentioned, this quarter was negatively impacted by certain environmental challenges that led to higher frequency and severity as well as adverse prior year reserve development. Our Specialty P and C segment's as adjusted underlying combined ratio of 106% reflects an approximate 45% to 50% change in frequency and an approximate 8% to 10% increase in severity due to supply chain issues, such as commodity prices and labor shortages. On the bottom half of the page, we display sources of volatility. You can see the impact that the increased litigation and social inflation had on the prior year reserve development and in our financial results. In a moment, Duane will provide additional details on this. On Page seven, we displayed 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. Over the past 12 months, return on tangible equity excluding unrealized gains, was 11%. As discussed earlier, relative to last quarter, tangible book value per share, excluding unrealized gains, declined 12%. This was largely due to the AAC acquisition and its corresponding goodwill. Going forward, the reference industry environmental challenges will likely pressure near-term tangible book value per share growth relative to historical performance. That said, we believe these challenges to be short-term in nature and do not believe they will impact our long-run targets. Continuing on Page 8, we highlight the strength of our balance sheet specifically, our insurance entities are well capitalized, liquidity remains strong and our debt-to-capital ratio of 20.7% is well within our stated target range of 17% to 22%. This profile provides us with a significant degree of financial flexibility to optimally navigate this environment and make appropriate investments. On Page 9, we demonstrate our strong capital stewardship. This year, we've taken approximately $580 million of capital actions. Through June 30, we repurchased 3% of outstanding shares totaling roughly $160 million. In addition, as stated last quarter, we repaid the $50 million term loan, increased our annual dividend per share to $1.24 and closed on the acquisition of AAC. Turning to Page 10. Net investment income for the quarter was $114 million, reflecting the strength of our core portfolio and strong alternative investment performance. Our portfolio construction, which focuses on matching liabilities and total return, is designed to provide stable income through various cycles. This is evidenced through this quarter's pre-tax equivalent yield of 5%. On Page 11, we re-highlight our solar energy investment with Sunrun. Our investment dollars are being used to finance the installation of solar panels on a portfolio of residential homes. This helps provide a clean alternative energy source to homeowners. From an accounting perspective, returns will primarily be recognized through the income statement as tax credits and deductions with a portion of these items offset by reductions in the fair value of the partnership. While this is a multiyear investment, the tax nature of the transaction front-loads the return of cash and income recognition. Net result, most of the expected lifetime returns will be recognized this year. The largest expected impact took place last quarter. Cumulatively, the investment has increased net income by approximately $17 million or $0.26 per share. This is a great example of how we can use our capital to benefit both the environment and our stakeholders. In closing, while the company's quarterly financial performance was pressured by industry environmental factors, we are confident the corrective actions we have and are taking will return us to our financial targets over the next few quarters. With that, I would now like to turn the call over to Duane to discuss the results of our P and C segments.

Thank you, Jim, and good afternoon, everyone. Before I jump into our segment-specific results, I want to make a few comments about auto overall. So let's turn to Page 12. There are several environmental challenges that are impacting auto loss costs. On the frequency side, a significant rebound in miles driven has resulted in an increase in claims. At the same time, severity is increasing due to supply chain challenges, labor shortages, and social inflation. Recent Florida court rulings have changed some of the rules and requirements regarding personal injury protection. These changes impact multiple policy years. As a result, we reevaluated and increased our prior year reserves. This is part of doing business in Florida and does not change our commitment or our ability to serve this market in a manner that is good for both customers and shareholders. One of our advantages is the ability to quickly adjust our operating model and pricing to these types of legal changes, and that process is underway. Further, in line with what others in the industry have observed, we are seeing an increase in attorney involvement in claims. With the reduction in claim activity during the pandemic, plaintiff attorneys have now expanded their focus to lower limit policies. This has resulted in a higher level of expected loss costs to which we have appropriately reacted. We continue to monitor the situation and are actively taking corrective actions. Moving to Page 13. I'll start with Specialty P and C. Given the environmental challenges I just mentioned, the segment experienced a 17.3-point increase in its underlying combined ratio, resulting in an underwriting loss of $60 million. However, the current loss doesn't change our view of long-term profitability of the business. We remain comfortable with our underwriting practices and are taking appropriate actions to return the business to target profitability. From a top-line perspective, we had strong growth across the entirety of the franchise. Specifically, policies in force increased 5.5%, while written premium on a normalized basis increased 13%. This was significantly driven by Florida, Texas, and our expansion states, where we have achieved top quartile growth, highlighting the portability of our model into existing and new territories. Lastly, as I mentioned last quarter, on April 1, we closed the acquisition of American Access. It's been a pleasure working with our new colleagues, and we're making great strides on the integration that will enable us to leverage their capabilities to enhance our Specialty business. Turning to the Preferred segment on Page 14. The Preferred segment is facing similar environmental challenges. As a result, our business enhancements to date have been overshadowed by these challenges. Overall, in the Preferred segment, we continue to expect ongoing profit improvement actions to bring us closer to our desired results.

Thank you, Duane. Turning to our Life and Health segment on Page 15. Overall, the Life and Health segment's profitability is beginning to improve as mortality returns to pre-pandemic levels. For the quarter, segment income was $13 million driven by lower levels of mortality and strong policy retention. Further, for our products, the environment is creating stronger consumer demand. This is seen through increased new issuance and improved policy retention. Issuance levels are above pre-pandemic levels, retention of 94% is at a historic high. The combination of these items produced a net result of a 5% increase in Life earned premium. Overall, our outlook for the Life and Health business remains positive, and the segment is positioned for profitable growth. In summary, while this quarter's financial results were disappointing, they were not a complete surprise. When we concluded last quarter's earnings call, we stated that we expect to see a decrease in mortality, more auto insurance purchases increases in auto frequency and loss cost inflation, and a robust economy and associated investment impacts. All of these factors came to fruition at a faster than anticipated rate. Our balance sheet provides appropriate financial protection for these types of changes. Further, our business model is designed to be nimble, efficient and responsive. We expect to quickly improve results and continue to use our competitive advantages to profitably increase market share. Despite this quarter's challenges, we remain in a strong financial position, and we'll continue to deliver on our promises to our customers and to provide attractive long-term results and value creation for our stakeholders. I'll now turn the call over to the operator for questions.

Our first question today will come from Greg Peters with Raymond James. Please go ahead.

Good afternoon everyone. I want to focus on the Specialty Property Casualty segment and its underlying results. Could you provide some insight on where the decline was most pronounced? Was it in California, the expansion states, or Florida? Additionally, I reviewed my Infinity Property Casualty model, and I found that going back to the early 2000s on a quarterly basis, they never reported a combined ratio this high. I'm fairly certain that's the case. I'm curious if you're managing everything as an integrated operation now, but can you determine whether the issue is concentrated in a specific area of the business, or is it happening across the board?

Yes. We'll tag team the results a little bit here, Greg, and thanks for the question. What we're seeing is a broad set of reopening with a fairly significant bounce up in frequency and some very significant issues around severity. The supply chain issues have seen a rapid change. You're getting an increase in parts, you're getting an increase in cost to get a rental car, you're getting delays in how long things take to run through a body shop because they run through labor shortages or trying to get whether it's chips or parts or the like. We are seeing some social inflation creep into our business in ways that we weren't in prior quarters. I think part of what you're seeing is that attorneys who had been focusing on higher limit policies during the pandemic saw a reduction in frequency; they started looking for other places, and they moved more into lower limit policies where we hadn't seen them before. So that's putting some pressure on that. You've got the normal medical cost inflation that you're seeing. So sort of all of those are happening fairly rapidly at one time. We foreshadowed those for you last quarter. We described that we expected to see supply chain challenges and somewhat of a demand surge later in the year. Honestly, I thought it was going to be third quarter and fourth quarter, not as much in the second quarter, but it came in largely as expected. What we normally would have seen in the Specialty business is those things would have crept in a little slower, and our capacity to adjust with rate would have been more rapid. Given the last 12 months of particularly low combined ratios, the ability to turn hard on that wasn't there. So it's going to take a little bit of time to do that because when you look back at a rate file and you look back at the more recent history, it shows some positive profitability. So we're seeing the issues not appear to be anything at all from an underwriting perspective or an underlying model perspective; we're seeing a temperature rise across our book. Honestly, in some ways, the way you watch the progressive combined ratio and underlying combined ratio go up over the last three or four months, very similarly and very much in parallel the points of the underlying combined ratio change are similar.

Yes. In addition to what Joe mentioned, I want to highlight that there are some elements of purchase accounting and other factors influencing the numbers. I encourage everyone to focus on the six-month underlying combined ratio for the specific business, which stands at 99. This is certainly above our historical averages. However, the quarter may not purely reflect itself as there are factors affecting it. There is some intra-year development affected by our PIK for the year. As we gain more insights into this quarter and consider how it may unfold throughout the year, we recognize that certain conditions might inflate the quarter's numbers compared to a six-month view. Additionally, we are revising our estimates related to the severity, not just the frequency, indicating a continual rise. This might be attributed to increased rental car days due to chip shortages or labor shortages among other reasons, and we have adjusted our forecasts accordingly. Overall, while the full year reflects a solid performance at 99, the quarterly outlook appears higher.

One other thought, this is Duane. I believe you touched on a few points, but Joe mentioned that the overall profile of the business hasn't changed. We continue to attract and write the same types of insurance we've historically offered. There are some state-specific nuances, as you might expect. Nationwide, we're observing variations driven by when states reopened, which has resulted in different outcomes. California, for instance, opened later in the quarter, so we saw its effects down the line. Regarding historical data, if you look back to the time of Infinity, you likely wouldn't have noticed the environmental challenges we faced as COVID impacted the market and things slowed down, leading to some distinct outcomes. Now, as we reenter the market, we're experiencing unique situations. Joe and Jim highlighted issues related to severity and frequency pressures, and I believe it will take some time for things to normalize.

Thank you. I just wanted to follow up on your earlier point. You mentioned that the attorneys are targeting lower limit policies. Are legal costs considered to be outside or inside the policy limits for these lower limit policies? I'm curious about what the lawyers find appealing about minimum limit policies.

Yes, not all of our policies have minimum limits, but there are lower limits. Even if someone is targeting a policy with limits of 25-50, they view those limits as potential dollars and may pursue legal action based on that. They might think they can find an additional $10,000 or $15,000. I've compared this to the situation with rats in Chicago during the pandemic; with less activity, they emerged and became more noticeable. Similarly, some trial lawyers are venturing into areas they hadn't before. While these smaller limits don't hold significant dollars, they do exert some pressure. However, we don't view this as a fundamental underwriting issue. We are confident in the business we are writing. A couple of quarters ago, you asked how long our combined ratios would remain low, and we communicated that we didn't expect them to last indefinitely due to a potential rebound from the pandemic. I wouldn't draw parallels to the worst quarter for Infinity. The pandemic caused an unusually quick decrease in combined ratios, which will likely lead to a similarly atypical increase, but ultimately it will stabilize. We are very comfortable with our long-term pricing targets and are optimistic about growing the business in this environment. I encourage you to consider the full-year numbers Jim mentioned and note that we are maintaining a proactive growth strategy.

Got it. First of all, I love the analogy of rats. So that's going to go down in the record books. But more seriously, you said you thought that things were going to really deteriorate in the third and fourth quarter. When you say it's going to take you a couple of quarters to get back to a normalized combined ratio, should we assume that at this point, because it's emerging, getting sequentially worse month by month that maybe things continue to escalate, but then when we get toward the end of the fourth quarter, we start to see improvement? Is that sort of the cadence of what we should be expecting?

Yes, I'm going to answer your question slightly different, Greg, but try to get you where I think you're trying to go. And I'm going to try to avoid giving forward guidance or giving you a number to pick. What I would tell you is that typically, in the Specialty auto business, we think we can adjust around a profitability issue inside of a couple of quarters. My sense is this is probably more like a two to four period rather than 1.5 or two. That's because of two principal issues and all the other noise is working through there. I think you're going to see inflationary pressure on the supply chain, labor shortage and medical costs that are going to continue to stay elevated, higher than normal for at least 12 months, maybe 18 months. That's one. Number two, rate filings typically require you to look at your historical data and put some sort of projection in for trend. The historical data that we're all showing across the industry has had some periods of very attractive returns. This is going to be a conversation with regulators that we're all going to wind up going through. It's going to be an industry issue of looking at those quarters of attractive returns. We're going to look at the returning frequency, the returning severity, and an elevated severity, and it's going to wind up being a set of conversations around which of those two should we put more weight on, the past or the future. Ultimately, I think the regulators are going to realize that if they don't let the industry move and respond to the forward-looking loss trend, it's going to cause carriers to restrict availability and it's going to cause a supply problem from an insurance perspective. But that usually has to occur before the insurance departments recognize all of those issues. So I think it will take a little bit of time, a little more than normal. It's not something that I think is going to take years, but somewhere in that two, three, maybe four quarter time period to get back into that mid-90s range that we like to be at.

Got it. That was a very thoughtful answer, thank you.

Our next question will come from Paul Newsome with Piper Sandler. Please go ahead.

Thank you, so I'm looking at the loss ratios for the Specialty business in 2019, and you're running about 75%. We had a couple of points of improvement in 2020, which I think were mostly attributed to the stay-at-home orders, but that improvement was much less than what we saw in other companies that are primarily standard.

Can I stop you for one second, Paul? I just want to make sure I'm understanding which segments you're talking about again?

The specialty and personal auto.

Okay. because I thought I heard you talking about homeowners.

No, I'm sorry, Specialty personal auto.

I'm sorry. Got it. Got it. Okay. Personal auto. Yes. Sorry.

There were a couple of points of improvement in 2000 that were attributed to the stay-at-home orders. It seemed that nonstandard business behaved differently than standard business, as drivers' behavior was less affected by state homeowners. Analyzing the current numbers, it appears that the loss ratio is around 80 on a run-rate basis. Am I incorrect in stating that the return to stay-at-home orders only accounts for a couple of points, with the remainder being due to environmental issues? I'm trying to understand the impact on policy in force count and how it reflects frequency versus other contributing factors. It seems like there were issues in 2000 that might have obscured problems not just this year but also in this quarter, which brings us back to the circumstances of 2000.

Yes. No, thanks for the question. This is Jim. Paul, I think I might encourage — first, I'd start with — I think it was more than a couple of points of potential impact. Now some of that was offset by premium credits or effectively, there was some increasing severity, right, that was on the other end that kind of brings you to that net answer that you're referencing. But now when you step forward, you've now had two years of severity trend running through, right? And instead of having like this or some way to come back and say you've got rate that would be similar to the premium credit that we gave up on the other side, right, that would have extended that instead of having a couple of point benefit; you might have a four- or five-point benefit, right, that was coming through there. We now have the other end where you've come almost instantly, kind of back. And I think again, I'm not too much of progress, but I think they do a nice job right with the monthly financing when you see that 47%, 48% type frequency increase, the speed with which that came back isn't like anything, even in the way going down to some extent other than And now you have nothing to match that against both for rate to offset the severity pressures in the other that are coming back on the other side. And so it's unfortunate in terms of how these things align. If it would have taken a few more quarters for this to kind of normalize from a frequency perspective, I don't think you get quite the same level of impact from the severity side because you don't put the same pressures on the supply chain that, quite frankly, are being put there now. On top of that, you've got an increased period of time to provide data to the regulators to work with them so that this is more matched. And so your rate can be a little bit more balanced, right, in terms of how it comes in versus what you're seeing now, which is just quite frankly, these two things are disjointed. And again, it's unfortunate, but it's not something that we won't fix or not used to. I'd highlight how we responded with AU and how quickly we brought that to fusion. Now we've got an unusual saver time, we'll work through that. But this isn't going to change the long-term underlying profitability of this business or the benefits that we're going to bring and continue to bring to customers or our ability to take medium- and long-term market share. So again, unfortunate. It's definitely got our attention. That's an understatement, but we'll respond and we'll get back to where we were.

Could you contrast the situation underlying all these with the preferred versus the nonstandard auto? And is it basically the same themes with the same magnitude? Or are there other differences that we should think about between the two segments and how we've sort of into it?

Sure, Paul. They're largely the same themes. There are a few things that are exacerbating in the specialty space. The Florida PIP issues are specialty only because we don't do Florida business inside of Preferred. So those are unique and understandably different there. What we saw in the Preferred business was a little bit of a difference in the frequency changes. You highlighted this before. In the pandemic, the Specialty business didn't see as much of a frequency good guy when people went home as the preferred did. And the rebound has actually been bigger in the Specialty business. Those folks were less likely to have worked from home before. As a rule, they were less likely to be able to continue to work from home. So as there's been some increase in miles driven that gives you a little bit of a difference in frequency delta and distribution around those. I think our Specialty business just saw that a little differently. I think the biggest issue between them is probably coming around the PIP and the slope of the frequency numbers. I think if I were measuring where they were net-net but down to the up, the Preferred probably is still a little ahead in total net-net from those two. You get any percentage change when you're comparing period over period. But net-net, Specialty is a little worse off than that on the combined.

Yes, good afternoon. I think most of what you've discussed has focused on personal lines, particularly Personal Auto. Could you provide some insight into the commercial side? I understand it has better combined ratios, but are the same trends affecting that segment of the business as well?

Gary, this is Duane. Yes, I think you are correct. It's a little more, I would say, subtle inside of the commercial line side, but we're obviously seeing the frequency impact. There's a little bit on the severity side. It's distributed in terms of volume, slightly different than the Personal Auto side is. But again, it continues to generate decent returns, and we're watching it closely. And to Joe's point, where we're making changes along the way as the market moves on us, we're doing that inside of that business as well.

We're not really seeing a change in the social inflation there. So whatever was there, was there before. It obviously doesn't have any impact of the PIP that we saw in the PI side of the house, and it had a little bit of a better starting point. So it's just got the general environmental issues, but some of the idiosyncratic things that we're running through the rest of the Personal Auto in the specialty space aren't there?

Understood. In addition to the rate adjustments you mentioned, are there other measures you could implement that might bring about quicker changes, such as altering the way you handle new business, payment plans, or similar strategies that could serve as significant levers?

Gary, this is Duane again. Yes, you're exactly right. We continue to manage the underwriting side and are constantly monitoring it. In response to Joe's earlier comments about our actions, we've pulled back many of those over the past 30 to 60 days as we've observed changes in the market and environment. We will continue to do so within the guidelines we must follow while preparing for the upcoming rate changes. We have several initiatives across our business lines that we are readying for implementation as soon as possible. In the meantime, we are adjusting using the segmentation and underwriting options available to us to respond to current conditions. So, in summary, yes, we are adapting.

We're taking, Gary, in our thought process. We're not taking a quarter at a time view. We're taking a longer-term view. And what I'll point you to, as you remember, when this management team first came in, we had an Alliance United acquisition that was running a 125 combined ratio and growing at 30-some-odd percent. We had a relatively quick fix on that, and we never slowed the growth in that business below 20% because we believe the best long-term intrinsic value creation was to be able to grow that business and produce returns over the long term. And that's what we did inside of that. So if we thought it was going to be a longer-term trade, we might have a different point of view. But when we look at it, we're saying what produces the best long-term NPV and growth in tangible book value, and that's going into our thought process. So it impacts the confidence we have on the speed.

All right. Thank you very much.

Next question will come from Matt Carletti with JMP Securities. Please go ahead.

Thank you, good afternoon. I have a quick question about the previous year's development. We focused a lot on the accident year, but I wanted to ask about your level of confidence or conservatism regarding this matter. Are you feeling that, at least from the previous year's perspective, it's hopefully behind you? Additionally, regarding the PIP perspective, what has your experience been with the tail in that business? I understand the statute of limitations is five years, but which accident years does the 76 relate to? I'm trying to understand once we move some distance away from these events, when you feel confident about the tail.

There’s a lot to unpack here, so let me break it down. Regarding development and confidence, I acknowledge that there is significant variability in the environment. However, I believe we are striving to provide our best estimates while aiming for the higher end of the confidence range. We assess how the severity of claims is evolving and what ongoing severity contributes to resolving those claims. Our approach remains consistent as we analyze these factors. From a preference perspective, we aim to maintain a strong balance sheet, so if we need to choose a direction, we tend to prioritize our balance sheet's integrity. I’ll pause here to see if there are any follow-up questions before we delve into the second part of your inquiry.

No, that makes sense. Thank you.

Okay. It might be a bit challenging to pinpoint when we will receive the PIP item bids from Page since some court cases concluded in June. Historically, it takes about nine to 18 months before we can determine whether we'll adjust our development factors slightly up or down. We've carefully considered the expected development pattern and aimed to be thoughtful in our approach. I prefer not to revisit this topic in the next couple of quarters, so we've provided our best estimates for ultimate claims. Within nine to 18 months, we should have clear patterns that will confirm our predictions, and while there may be slight fluctuations, I don’t expect significant changes. I'll ask Duane and Joe to share their insights as well.

Maybe I'll jump in here, Jim. And Matt, I want to make sure we're answering the question the way you were asking it. I think Jim was giving you a balance sheet confidence on the PIP question. Were you asking that? Or were you asking sort of changing PIP environment? And how long does it take to sort of work through it environmentally and from a business perspective?

It was a little bit of both. And I think the balance sheet question is pretty clear, but any color on the latter would be helpful.

From an environmental perspective, Florida PIP is often complicated. There are always trial lawyers and medical providers trying to take advantage of the system. This creates a challenging environment, especially for those who aren't very proficient at it. However, we don't see the recent court decisions as fundamentally altering how PIP operates in Florida. The ruling affects how most carriers interpret whether to pay the fee schedule or a limited amount. We believe these interpretations were intended to be included in the law for various reasons. The legislature has made some adjustments, including some changes in wording. This could mean a few hundred dollars added per claim, impacting the total by about $50 million to $55 million on a $2.5 billion business. This represents a slight percentage change for us, as our combined ratio has been in the high 8s and low 9s over the last five years, depending on the specific time period. Florida PIP remains an attractive business for us, and while this ruling impacts how we manage some existing claims and think about new ones, we wouldn't significantly alter our approach in Florida beyond a few adjustments and a review of certain open claims.

That's really helpful. I appreciate the insight about the law.

Last question will come from Jeff Schmitt with William Blair. Please go ahead.

Hi, thank you. Was any of the adverse reserve development related to American Access? Or was it all Kemper and IPCC? Just curious how reserve levels are sort of looking there?

No. The development that's being referenced is Kemper and Infinity combined book. There's no AAC there, it's inside those numbers. And I think we continue to be appropriate and strong, and we've dug through AAC multiple times, and we'll continue to do that. I'm very happy with the acquisition, very happy with the strength of the balance sheet, underwriting; nothing there that has changed any of our thoughts, assumptions or other at this stage.

So it doesn't seem to be in the same situation as Kemper?

What we're observing are the same environmental issues you are, such as increased frequency and severity, along with supply chain challenges and labor shortages. We're dealing with all of those factors. There was no significant performance improvement program affecting that situation. If you exclude the performance improvement program from the previous year, we aren't dealing with a large set of numbers. So it’s essentially the same situation; these are similar drivers in similar environments. Therefore, the frequency and severity issues are present in the overall portfolio.

Okay. And then you provided some color on just social inflation moving down into those lower limits. Do you know what percentage of claims have attorney representation now versus maybe a year ago or maybe versus like historical levels?

Yes, we have an understanding of it. It's not something we usually share. Depending on the various entities we acquired, they categorize claims somewhat differently, including claim counts and feature counts. Some may count an accident differently, such as the number of vehicles involved or the number of individuals in those vehicles. This leads to different counting methods. Consequently, the rates appear slightly altered when we examine the historical data across the books. It's a notable change, but not by a large margin.

Okay, got it. And then inflation on the homeowner side. What is that trending at? I mean we've heard from others that it could be as high as 10% increase in loss cost trends. Are you seeing that there too?

Yes, we are. I think we're consistent with what others are experiencing in the industry, whether it's body shops or lumber prices or labor rates.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Joe Lacher for any closing remarks.

Thank you, operator, and thanks, everybody, for joining us on the call today. We appreciate your time and interest. We know that the pandemic created a lot of interesting challenges, as we all sort of started working from home and staying at home, and it's going to create an interesting set as we reopen. But we're very confident about our overall business model and our long-term prospects and are excited to talk to you again next quarter. Thanks a lot.