Good afternoon, ladies and gentlemen, and welcome to Kemper's Fourth Quarter 2022 Earnings Conference Call. My name is Jason Erne and I will be your coordinator today. 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.

Thank you, operator. Good afternoon, everyone, and welcome to Kemper's discussion of our fourth quarter 2022 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; Matt Hunton, Kemper's Executive Vice President and President of Kemper Auto; Duane Sanders, Kemper's Executive Vice President and the Property and Casualty Division President; and Tim Stonehocker, Kemper's Executive Vice President and President of Kemper Life. 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 John Boschelli, Kemper's Executive Vice President and Chief Investment Officer. After the markets closed today, we issued our earnings release and published our earnings presentation and financial supplement. We intend to file our Form 10-K with the SEC within the next week. Our discussion today may contain forward-looking statements with 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 condition. Our actual future results and financial condition may differ materially from these statements. These statements may also be impacted by the COVID-19 pandemic. For information on additional risks that may impact these forward-looking statements, please refer to our 2021 Form 10-K as well as our fourth quarter earnings release. This afternoon's discussion also includes non-GAAP financial measures that we believe are meaningful to investors. In our financial supplement, earnings presentation and earnings release, we've defined and reconciled all the non-GAAP financial measures to GAAP where required in accordance with the SEC rules. You can find each of these documents on the Investors section of our website, kemper.com. All comparative references will be to the corresponding 2021 period unless otherwise stated. I will now turn the call over to Joe.

Thank you, Karen. Good afternoon, everyone. Thanks for joining us today, and welcome to our fourth quarter conference call. I want to start by saying that I'm optimistic about Kemper's future. The quarter included improving underlying profitability masked by a few infrequent items impacting financial results. Our top priority remains returning the company to target profitability. Further, our initiatives to enable greater capital return while reducing volatility in earnings and cash flow are well underway. We are observing continuous improvement in the underlying profitability of our core businesses. Our recent strategic actions are already delivering results. I'm bullish about achieving adjusted consolidated net operating income during the first half of 2023 and producing underwriting profits during the second half of the year. The strength of Kemper's differentiated capabilities, market focus and enhancement initiatives positions the company to provide attractive near- and long-term returns to shareholders. In the fourth quarter, we made progress on each of our initiatives. Highlights include the following: rate-taking activities exceeded the third quarter forecast, rate approval for California specialty personal auto, cost structure enhancements aligned with third quarter commitments, continued strong profitable Commercial Vehicle growth, and improved Life profitability. The current operating environment remains dynamic. This requires us to be agile, use quality and timely information and have a team that can quickly ingest, adapt, and respond to these changes. We have the right team in place to navigate through this period and capture the opportunities that will emerge on the back side. As a reminder, we'll be holding an Investor Day in New York on Thursday, March 9. This will be a great platform to discuss Kemper's journey to date and the road ahead. The event will include presentations from myself and Jim as well as Matt Hunt, who leads our Specialty Auto franchise; and Tim Stonehocker, who's responsible for our Life business. As a result, Matt and Tim are joining our usual speakers today. I'll now turn the call over to Jim to discuss additional details on our operating results and an update on our strategic initiatives.

Thank you, Joe. I will begin on Pages 4 and 5 with our consolidated financial results. For the quarter, we generated a net loss of $0.87 per diluted share and an adjusted consolidated net operating loss of $0.41 per diluted share. This included unfavorable prior year reserve development of $8 million and $9 million of catastrophe losses in the quarter. The ongoing environmental challenges facing the P&C and life insurance industries continue to impact Kemper's financial results. Significant factors include severity trend inflation, seasonality and modest adverse development and while moderating elevated mortality. Our energy and efforts remain concentrated on restoring the business to profitability and the inputs that will enable us to achieve our target returns. These include filing for additional rate, implementing further underwriting actions, and reducing expenses. The combination of profit actions earning in at an accelerated pace, improvements in expense run rates and reduced mortality in our Life business will lead to continued improvement in our financial results. Turning to Slide 6. To enable greater insight into our underlying results we have included an underlying reported to normalized combined ratio walk. It details the biggest items impacting our P&C ratios. This includes seasonality and modest reserve development. Normalizing for these items, we saw approximately 1 point of sequential improvement in Specialty's underlying combined ratio and approximately 3.5 points of improvement in preferred P&C. Moving to Page 7. This quarter, we had modest prior year and intra-year development. It was driven by elongated settlement timelines for third-party claims, additional defense costs driven by an increase in litigated PIP claims, and a decline in salvage values relative to used car prices. Consistent with our reserving philosophy, we react quickly and provide operating transparency into trend changes. Despite the challenges today's environment creates, we are able to accomplish this due to the quality and speed with which we gather and act upon information. This allows us to maintain appropriate reserves. Recall that for the year, we had favorable prior year development of approximately $17.4 million. Moving to Page 8. Last quarter, we announced several operating model enhancements to improve productivity and growth including expense reductions. These initiatives are on track, and we expect to deliver on each of our commitments. During our fourth quarter, we secured approximately $61 million in run rate savings. This included 0.6 points or $34 million improvement in our LAE ratio, approximately $18 million in enterprise expense reductions, and $9 million in savings from real estate optimization. Turning to Page 9. We highlight the strength of our balance sheet. We have appropriately capitalized insurance businesses and a healthy liquidity balance of $1.3 billion. Further, we continue to have the capital needed to navigate this environment and appropriately invest in the advancement of core capabilities. In addition, as previously disclosed, we are committed to reducing debt outstanding by $150 million and bringing our debt-to-capital ratio back to our long-term target of 17% to 22%. Moving to Page 10. Net investment income for the quarter was $106 million. New investment yields are up 250 to 300 basis points over the prior year, leading to a pretax equivalent annualized book yield of 4.6%. We estimate $275 million to $325 million of our fixed income portfolio will be subject to reinvestment in 2023. This will provide incremental improvements to future investment income. On Page 11, we provide an update on our strategic initiatives. During the quarter, we submitted our initial filings with the Illinois Department of Insurance to establish a reciprocal exchange. We also formed Kemper Management LLC to serve as the reciprocal's attorney-in-fact. The project is on track, and we expect to write premium in the structure during the third quarter of 2023. Additionally, we completed the sale of Reserve National Insurance Company and its subsidiaries otherwise known as Kemper Health to Medical Mutual of Ohio on December 1. Finally, as indicated on our third quarter call, we initiated a strategic review of Kemper Personal Insurance, our preferred home and auto business. We continue to explore options and we'll share additional details when available. I will now turn the call over to Matt to discuss the Specialty P&C business.

Thank you, Jim, and good afternoon, everyone. Moving to Page 12 and our Specialty P&C business. Aligned with Joe's earlier comments, we are laser-focused on restoring the business to target profitability. Our actions are outpacing loss cost trends and underlying profitability is improving. As noted on Page 6, during the quarter, the specialty auto book reflected a sequential normalized underlying combined ratio improvement of approximately 1 point, driven by the realization of earned rate exceeding loss trend. Let me comment on the two components of Specialty Auto business. Since the third quarter of 2021, on a weighted average basis across our entire personal auto book, we have filed for approximately 43 points of rate. Through the fourth quarter, 21 points have been approved and are effective in the market, with 8 points of that having been earned. As we move forward, we will continue to file rates aligned to loss cost trends. Shifting to Commercial Vehicle, the business continues to perform well. For the year, the underlying combined ratio was 93.8%, year-over-year net written premiums grew 33% and policies in force grew 17%. To reaffirm, the segment is expected to see additional improvements in the first quarter and deliver underwriting profits in the second half of 2023. I will now turn the call over to Duane.

Thank you, Matt. Now we'll turn to Page 13. Similarly to the specialty auto business, the preferred segment is focused on restoring profitability. As noted on Page 6, preferred quarter was impacted by a few unusual items. This includes seasonality and modest prior quarter reserve development. On a normalized basis, the underlying combined ratio improved by approximately 3.5 points. As we look forward for the next couple of quarters, we expect the rate and non-rate actions we have taken and will continue to take to keep pace with trend, and we will deliver profit improvement in the second half of the year. I will now turn the call over to Tim to cover the Life business.

Thank you, Duane. Turning to our Life & Health business on Page 14. Despite higher levels of inflation impacting our market segment, the business continues to see strong sales demand and good persistency. New business sales are aligned with prepandemic levels and profitability continues to improve with pandemic-related headwinds subsiding. Excess mortality has declined for the last three quarters, and we are nearing prepandemic mortality levels and expect continued improvements. In addition, the business continues to benefit from new investment yields at or above our pricing assumptions. The combination of these items will lead to additional improvements in our financial results. I'll now turn the call over to Joe.

Thanks, Tim. Turning to Page 15. In summary, I continue to be optimistic about our prospects. You should leave this call with a strong understanding of the following: first, the financial benefits of our initiatives will earn into the book on an accelerated basis. We expect to be profitable in the first half of the year and make an underwriting profit during the second half. Second, the inputs that drive profitability continue to trend positively, including rate in excess of loss trend, improving mortality and interest rates above pricing assumptions. Third, restructuring and integration efforts are on track to produce targeted expense savings. And lastly, our reciprocal and Bermuda capital initiatives provide short- and long-term opportunities to further optimize capital and reduce risk. We are confident in the actions we have taken in response to increased loss costs seen over the last 18 months. We are trending in the right direction. Enhancements in our operating model will further advance profitability gain. Finally, I want to thank our entire Kemper team for their collective effort and dedication. With that, operator, we can now take questions.

Our first question is from Greg Peters with Raymond James.

To start off with, Joe, thanks for the guidance that you've provided regarding expectations for operating income in the first half of '23 and underwriting profitability in the second half of '23. I'm wondering how the rate actions that we're seeing that you filed for the first quarter '23. How those come into play and intersect with the guidance that you provided? Or is the guidance you provided really a reflection of the previous rate action you've taken?

Greg, thank you for your comments. The primary factors will be driven by actions already taken, especially in the first half of the year. If we submit a filing in the first quarter, there is a low chance it will be approved and become effective in time to influence the written rate and earned rate, which means it will have a minimal effect on the first half of the year. However, if it receives approval early enough, it could start to be reflected and impact the latter half of the year. You should expect that we anticipate making profits in the first half and achieving an underwriting profit in the second half, regardless of whether we receive approval for the first quarter figures.

Can you provide an update on Florida PIP? I'm noticing the policy count growth and a decline. Can you clarify how this is affecting the network? Is it a regional issue or can you highlight where the main challenges are currently?

Sure, Greg. And I'm going to start with a quick comment then I'm going to actually ask Jim to because I would tell you this is a function, maybe a little less operational and a little more of how it's working through some of the reserving numbers. Maybe, Jim, you offer some comments and these guys want to add?

Yes, thank you, Joe. In this quarter, we've observed an increase in litigation activity related to PIP claims in Florida. This change prompted us to reevaluate our expectations for the litigation rate, both for this year and in previous years. Importantly, we haven't noticed any significant changes in severity. The focus is purely on defense costs and ensuring we allocate the appropriate amounts given the increased frequency. While I'm not entirely certain about the reasons behind these changes, they may be related to shifts in property dynamics. Overall, we managed the situation this quarter, and there's nothing more to report beyond that.

Yes. This is Duane. Only one thought beyond that. I think it's important to recognize that in that space from a litigation perspective, not all litigation is created equal. And a lot of times, there's what I would prefer or call, frivolous or meritless type litigation, but you still have an obligation to defend. And so to Jim's point, you probably don't see a lot on the severity piece and it's more on the defense side. And we were just truing that up, making sure that we're in a position to handle those as they come through.

Got it. The last question is about the catastrophe reinsurance renewals, which is a current topic in the industry. I noticed on Slide 19 that you mentioned your program. It appears that your retention on catastrophe excess of loss hasn't changed, but you did discontinue the agriculture program. Can you provide some insight into what's happening there?

Yes, thanks, Greg. Jim here. Looking at the overall picture, it's clear that everyone is aware of the trends in the reinsurance market, particularly with inflation and various uncertainties in play. In the past couple of years, we have been nearly breakeven from a pricing perspective. We haven't had any claims since 2018. Given the current increased pricing, it no longer makes financial sense to continue maintaining our position, especially with our shrinking book and the added diversification in our property book. So historically, we valued this at a couple of million dollars, which could have been $3 million or $4 million if viewed differently. This is not a significant factor in terms of our overall changes. Our priority remains on finding the best solution for our shareholders and stakeholders, and we have adjusted our strategies in line with the market developments.

Our next question is from Brian Meredith, UBS.

A couple of them for here. Just a quick clarification. When you say profitability in Specialty P&C, do you mean Specialty Commercial and Specialty Personal will both be profitable underwriting wise in the second half of the year or just in total?

Yes. In those comments, Brian referencing the segment in total.

Got you. Specialty Commercial is already profitable. I'm curious about your loss trend assumption behind that statement. Are you expecting to maintain the current double-digit levels, or do you anticipate a decline to single digits? What is your assumption?

We don't disclose our assumptions in detail, but recently we have observed trends that are more in line with historical norms. There is still some inflation present, particularly in commercial areas where we see levels in the low double digits. In the auto sector, that might be around 5% to 6%. This assessment takes into account various factors such as state and coverage mix. We're aiming to provide a comprehensive net answer that includes the earned rate and other elements. If we refer back to our previous discussions, consider sequential improvements related to the additional earned rate and how underwriting actions will offset some of the trend. At this point, you might expect a slight addition, around 1 to 1.5 points, due to the fact that some underwriting actions may not significantly rise in the short term and won't completely counterbalance the trend. So, while there's a bit of insight here, you should approach your expectations for improvement from a baseline perspective, considering whether the pace will be slightly faster or slower. This might result in a difference of 1 to 1.5 points relative to trend actions, guiding your eventual conclusions and adjustments based on expected progress.

I understand. My point is that if you don't reach your target for underwriting profit by the end of the year, it will be because the trend is performing better than you anticipated.

It would be. We would update our guidance accordingly, but this situation would be unforeseen and significant to some degree. If we’re discussing a point or two of variation throughout the year—whether slightly higher or lower—we feel comfortable relative to the guidance we've provided. So again, we have been confident about our expectations regarding profitability.

I understand. Over the past two years, we haven't encountered anything unexpected. For my second question, I'm curious about California. It appears you submitted a request and received approval for a 6.9% rate increase. I noticed a competitor managed to secure a much higher increase, over 17%. Does this make you reconsider your strategy regarding rate increases in California?

I'm going to answer it in sort of two ways, and then I'll let Matt offer some comments, too. That's not making us rethink our strategy because you haven't outlined our entire set of tactics at this point. We filed for that 6.9% that was approved some time ago. We have since filed for additional rate in those programs, and that's at roughly 30 points. It will show up on the state side and I think at roughly a 37% because it combines the two and the state is actively working those with us. So we're aware of what's going on in the marketplace. We're aware of what's moving. And we're several months past that being filed and working. So it's not new. I'll let Matt comment on sort of where we are.

So this is Matt. Just a couple of quick thoughts on our ongoing conversations with the California Department of Insurance. So we have a great relationship with them. We have a good conversation flow back and forth. As we navigate through the filings, one thought I would add is we file generally what our experience supports, and we're confident in the data, right, as we submit that to the California Department. And as we go back and forth, we'll work it as expeditiously as possible. But our expectation is that the current filings that we have, we will work them through the filing. Hopefully, we'll get them through and effective sometime in the near future.

Especially to this point have been productive and active. They're not sitting dormant and they're not moving. And I would maybe just make the general comment that the larger filing you referenced gives us confidence as an industry that things are moving.

Our next question is from Paul Newsome with Piper Sandler.

I was wondering if you could discuss auto claim frequency a bit. Please correct me if I'm mistaken, but I assume that many of your non-rate effects have positively influenced that frequency. I'm curious if there's any way to analyze or clarify how the frequency you're observing might change when accounting for the significant non-rate actions you're undertaking.

Yes, Matt, maybe you start taking a shot at specialty auto. I think that's the biggest place, Paul, on that. And Duane, you can you add some color to it.

Yes. So just quick comments on frequency. As a function of our underwriting actions and our pricing actions in the marketplace on a year-over-year basis, on the PPA side, we're seeing sort of pretty significant negative frequencies come-through. They're as expected in the negative sort of 10% range. On the Commercial Vehicle side, we're seeing a slight elevation, but that's also a function of our mix that we're pushing through. So it's a plus 2 plus, plus 3 in that range on the frequency side as we shift towards a more preferred segment on the commercial space. And so again, generally in line with our expectations and nothing is out of pattern for us.

I think, Paul, when we consider the overall situation, I remember you had a question regarding underwriting. The main takeaway is that we are still seeing frequency lower than prepandemic levels. Although there have been increases in some areas, overall frequency remains down, and the significant impact reflected in our financial statements is due to the severity factors we mentioned earlier. We are navigating through that. The good news is that the current environment, while still showing an increasing trend, is stabilizing and heading back toward normalized levels. Our early insights suggest that these trends are continuing in that direction. If anything changes, we will respond accordingly. For now, regarding trends, we are focusing on making further improvements in underwriting and maintaining our current frequency levels. We also aim for a continued normalization of the severity environment, supported by the substantial rates we have implemented to align with the severity environment, allowing us to return to traditional target profitability levels suitable for the business.

That makes a lot of sense. I was trying to consider whether you are looking to significantly improve the quality of the book rather than just increasing the pure rate, and if the decline in frequencies is mainly due to the shift towards a better book compared to an environmental change.

I think, Paul, when, I think, Matt gave you a roughly 10%, 11% decline in private passenger auto, I don't think you've heard anywhere a suggestion that frequencies are down 10% or 11% environmentally. I'm trying to be careful not to be exactly precise which one is which. But if you add up all the conversations you've heard about frequencies and other spots, you have to assume it was something other than an environmental issue working under there, wouldn't you?

I would imagine so. That would be my guess. But just trying to confirm.

It's a very material number.

That's a good question. Do you have any further thoughts on the competitive environment and how it impacts your profit expectations for next year? I assume we're still in a situation where competitors are generally pursuing similar strategies. However, could you share any recent observations regarding what your competitors are doing compared to your own approach?

Sure, Paul. I'll provide an overall comment that should encompass both our PI and Specialty Auto business. The majority of the industry continues to face profit challenges, and some companies are starting to recognize and address these issues. We anticipate that this will represent the commercial equivalent of a hard market for some time. At this stage, our focus remains solely on restoring profitability, without any immediate factors hindering our efforts. There is nothing unusual from a competitive standpoint that would limit our progress.

Our next question is from Andrew Kligerman with Credit Suisse.

I'd like to drill down a little bit more on Paul's frequency question because I'm thinking about Progressive's call last quarter, and they talked about frequency potentially beating down as much as 20% at that operation. The question for you is gas prices. Is that potentially the reason for lower frequencies? Or is it just a permanent change in driving behaviors?

I want to clarify a few points. First, I want to be cautious about how we interpret Progressive's items. They may have been referring to coverages or other factors in between. The number we’re providing is aimed at reducing confusion and represents the total impact on our portfolio. When considering this, while there are changes in driving patterns at different times of day, overall mileage driven does not appear significantly lower. In fact, in many instances, it's actually higher compared to pre-pandemic levels. On a baseline level, if we’re trying to compare directly, the frequency benefits experienced during the pandemic have mostly faded. Thus, we are now in a more normalized environment regarding frequency. Changes in frequency, along with our underwriting efforts and adjustments in mix and segmentation, are aimed at improving our outcomes and refining our portfolio. Looking ahead, we believe we will continue to build on these factors, and that's how we envision our progress moving forward.

And gas prices, the element there? Anything to add about that?

Gas prices are a factor. Jim was indicating that there was a significant drop in frequency during the pandemic lockdowns, followed by an increase as people began to go out again. Depending on the specific book, there's been a gradual return to prepandemic levels. Our book focused on Specialty Auto didn’t experience the same drop as others, and we rebounded to prepandemic levels earlier than most. For several quarters, we have reported that our frequency remains below prepandemic levels and is on a downward trend. In contrast, many others have reported slight increases as they return to prepandemic levels, leading to differing patterns. Again, our experience has been somewhat distinct due to our Specialty Auto focus and geographic concentrations, but we are monitoring these significant issues. Elevated gas prices can have varying impacts from quarter to quarter or year to year. However, the broader influences of the pandemic shutdowns, reopenings, and underwriting considerations are more significant. If we forecast for the next nine months, sustained elevated gas prices might lead to reduced driving due to inflationary pressure on disposable income. If you track both gas prices and miles driven, it will provide insight; flat miles driven doesn’t imply safer driving due to higher gas prices. If people are still driving the same number of miles, losses could still occur. This correlation between gas prices and miles driven is important to consider for projections. When examining individual companies, unique issues related to their underwriting or geographic exposure will emerge. Does that clarify things?

Yes, very helpful.

There are no further questions. So I'll pass the call back over to the management team for closing remarks.

Thank you, operator, and thank you, everybody, for joining the call today. I'll just leave you with two final thoughts. One, just another quick reminder. We'll be holding an Investor Day in New York on Thursday, March 9. We're excited about that opportunity to spend some more time with you, let some of our leaders get a little bit deeper into our core businesses and talk about our opportunities going forward. So we look forward to seeing you there. Details on attendance will follow. And just a reminder of the key takeaways that we had on Slide 15. We're bullish about where we are in our opportunities going forward and the fact that a lot of hard work going back into enhancing and restoring the company to target profitability and executing our strategic initiatives will really bear fruit over the course of 2023. So thank you for your time and attention, and we look forward to talking to you in March.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.