KEMPER Corp Q4 FY2025 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to Kemper's Fourth Quarter 2025 Earnings Conference Call. My name is John, and I will be your coordinator for today. 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, Michael Marinaccio, Kemper's Vice President of Corporate Development and Investor Relations. Mr. Marinaccio, you may begin.

Thank you. Good afternoon, everyone, and welcome to Kemper's discussion of our fourth quarter 2025 results. This afternoon, you'll hear from Tom Evans, Kemper's Interim CEO; Brad Camden, Kemper's Executive Vice President and Chief Financial Officer; Matt Hunton, Kemper's Executive Vice President and President of Kemper Auto; and Chris Flint, 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 the 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 in the coming days. You can find these documents in the Investors 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 on its future results of operation and financial condition. Our future results and financial condition may differ materially from these statements. For information on additional risks that may impact these forward-looking statements, please refer to our Form 10-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 SEC rules. You can find each of these documents in the Investors section of our website, kemper.com. All comparative references will be to the corresponding 2024 period unless otherwise stated. I'll now turn the call over to Tom.

Thank you, Michael, and good afternoon, everyone. I'll start with a simple appraisal. Our results this quarter did not meet expectations. We'll walk through the underlying drivers and the actions we're taking to improve the performance in our auto business and increase shareholder value. Before that, I want to offer some context on both the businesses and the operating environment we're presently navigating today. We're a specialty insurer focused on niche underserved markets. We are focused on these markets because they are attractive and there's a continuing need for our products. We know these markets and have the scale, experience, and competitive advantages to succeed. Our portfolio of specialty auto and life insurance businesses may address different customer needs, but both are managed with the same core principles: disciplined underwriting, risk management, and long-term value creation. We have identified and are acting on a number of strategic and tactical priorities that will get us to target profitability with growth to follow. We'll discuss these priorities in more detail today. As we noted before, the specialty auto market is a fast-moving segment. Market shifts often appear in this segment before showing up in other parts of the auto insurance landscape. As an auto underwriter, one of the most important drivers of our long-term success is our ability to accurately predict loss costs and price our business appropriately. This has been more challenging of late because of significant structural changes in key states in which we operate. For example, in California last year, minimum liability insurance limits for auto increased for the first time since 1967, with bodily injury limits doubling and property damage limits tripling. When markets are stable, predicting future costs is more straightforward. However, when changes of this magnitude occur, particularly against the backdrop of social inflation and legal system abuse, loss cost predictability becomes more difficult and complex. While we anticipated the need to adapt to the new requirements in California, the scale of the disruption exacerbated by elevated severity trends created pressure on our results over the past several quarters. In Florida, our second largest market, the tort reforms enacted in 2023 have reduced loss costs and made the market more attractive for carriers and affordable for consumers. The result is a significantly more competitive marketplace. This improvement in loss costs led to our $35 million charge this quarter for refunds to personal auto customers under the state statutory profit limit rules. We view these refunds, which other carriers are also undertaking, as clear evidence of the benefits of tort reform. We have a strong performing book in Florida, and we're making targeted rate adjustments there to be more competitive and support growth. Away from Specialty Auto, I'd highlight that our life insurance business continues to deliver solid performance. This business provides stability and diversification within our overall portfolio, and Chris will provide additional detail shortly. While our auto business faces near-term challenges impacting our consolidated results, we're acting quickly and taking purposeful steps to improve financial performance. On Slide 5, we outline the priorities and actions underway to improve results, enhance operations, and reduce earnings volatility through diversification. In particular, I'll note the recent restructuring initiatives, our focus to enhance claims processes, and the introduction of new products to support the acceleration of geographic diversification. Together, these actions will protect and advance our competitive advantages, drive growth, enhance profitability, and ultimately create value for our shareholders. Our objective as a management team is continuous improvement that strengthens performance and positions the company for long-term success. Before turning it over to Brad, Matt, and Chris, I'll provide a brief update on the CEO search. The Board search process is well underway, and they have developed a pipeline of highly qualified candidates with the help of a leading independent executive search firm. The Board is actively evaluating those candidates with deliberate speed as the Board focuses on identifying the right leader for Kemper's next phase. Thank you. And with that, I'll turn it over to Brad.

Thank you, Tom. Good afternoon, everyone. Before discussing the quarter, I want to expand on what Tom just shared. At a high level, the primary goals of our initiatives are threefold: first, to restore and improve profitability in our Specialty Auto business; second, to reduce earnings volatility through portfolio and geographic diversification; and third, to improve execution and operating efficiency by simplifying operations and capturing meaningful expense savings through restructuring and cost discipline. Taken together, these initiatives are designed to strengthen near-term performance while positioning the business for more consistent profitable growth. With that context, I'll now walk through our quarterly results. I'll begin on Slide 6. For the quarter, we reported a net loss of $8 million or $0.13 per share and adjusted consolidated net operating income of $14.6 million or $0.25 per share. These results produced a negative 1.2% return on equity and year-over-year book value per share growth of 4.6%. Despite these results, our trailing 12-month operating cash flow remained strong at $585 million. In our P&C segment, the underlying combined ratio increased 5.4 points sequentially to 105%, driven by elevated bodily injury claim severity in California and statutory refunds in Florida. Excluding the impact of refunds, the underlying combined ratio was 101.2%. The statutory refunds reflect improved loss cost experienced following Florida's 2023 tort reform. Policies in force and written premium declined 7.3% and 9.3% year-over-year, respectively. This decline reflects typical fourth quarter seasonality as well as non-rate actions to moderate new business writings in certain markets. Our Life business delivered solid results, driven by disciplined expense management. This business continues to provide a stable contribution to earnings and cash flow. And lastly, our balance sheet continues to provide flexibility to support organic growth initiatives and strategic investments. Turning to Slide 7. This slide provides additional detail on the drivers of our quarterly results. We recorded a $15.5 million charge related to restructuring, integration, and other costs. A portion of this relates to the restructuring initiative announced last quarter, bringing the cumulative annualized run rate savings to approximately $33 million, up $3 million from last quarter. This initiative is building momentum, and we expect to realize additional savings over time. Also included in this charge is a valuation adjustment for a tax credit equity investment that reflects its updated fair market value. This quarter, we also had two noteworthy items that impacted operating income, the Florida statutory refunds, and reserve strengthening. The Florida statutory refunds were recognized as a reduction to earned premium and added 3.8 points to the Specialty auto underlying combined ratio. Excluding this item, the underlying combined ratio was 101.2%. Finally, we strengthened loss reserves within Specialty Auto, primarily in commercial auto, reflecting updated loss experience related to bodily injury severity and defense costs, primarily stemming from accident years 2023 and prior. Turning to Slide 8. Our balance sheet provides financial flexibility. At quarter end, we maintained over $1 billion in available liquidity, and our insurance subsidiaries remained well capitalized. Over the past year, our operating cash flow enabled the retirement of $450 million in debt and the repurchase of approximately $300 million of common stock. As a result, our debt-to-capital ratio improved by 6.4 points to 24.6%, modestly above our long-term target of 22%. Moving to Slide 9. Our quarterly net investment income totaled $103 million, down $2 million sequentially due to lower returns within alternative investments. Our core portfolio comprised of high-quality investments continues to generate stable and gradually increasing net investment income. This income will continue to support our businesses. Overall, we maintain a high-quality, well-diversified investment portfolio supported by thoughtful asset allocation and prudent risk management. Next, on Slide 10. Here, we provide an update on our January 1, 2026, reinsurance renewal. Our catastrophe excess of loss program is a 1-year structure that provides 95% coverage for losses in excess of $50 million, up to $160 million. The total limit is $15 million lower than last year, reflecting the continued reduction in total insured value due to the wind down of our preferred business. This program structure is appropriate and reflects our exposure profile. The key takeaway is that our catastrophe exposure is meaningfully lower than it was several years ago. In summary, fourth quarter results reflect near-term pressure in Specialty Auto from elevated claims severity and Florida statutory refunds, and we are taking deliberate actions to improve results. We continue to maintain a well-capitalized and liquid balance sheet and are executing expense initiatives to enhance profitability. Our Life business delivered stable results, core portfolio investment income is positioned to benefit from higher reinvestment yields, and our reinsurance program remains aligned with our current risk profile. I'll now turn it over to Matt to discuss the Specialty P&C segment.

Thank you, Brad, and good afternoon, everyone. Turning to Slide 11. Adjusted for Florida statutory refunds, the Specialty P&C segment produced an underlying combined ratio of 101%, while personal auto produced a 105 and commercial remained relatively stable at 90%. Personal auto loss performance continues to be adversely impacted by bodily injury severity trends. This trend is particularly pronounced in California. As Tom mentioned, the recent doubling of state minimum limits is driving a structural change in BI costs. In response, we have taken decisive non-rate actions, resulting in the slowing of new business in the state. We are actively working with the California Department of Insurance on rate filings to address this liability rate need. In addition to underwriting and pricing actions, we continue to enhance our claims management processes. Over the last few years, we focused our efforts primarily on material damage management, which has been instrumental in offsetting the cost pressures of rising tariffs. More recently, our focus has shifted to third-party liability management. By leveraging advanced analytics and AI-enabled workflows, we are more quickly and accurately assessing claims, getting them in front of the right skill sets, and driving resolution. Our efforts are beginning to reduce excess attorney involvement and mitigate costs associated with legal system abuse. The result is lower optimal claim settlement costs and an improved customer experience. A high priority for the PPA business is achieving a more geographically balanced book. A more balanced portfolio will enable us to more effectively navigate market cycles, better manage state-specific dynamics, and reduce underwriting income volatility. Over the last few years, the concentration of our PPA business in California has increased, primarily driven by the post-COVID hard market in that state. This can be seen on Slide 12. This slide is intended to provide transparency into our current position and the direction we are taking. Over time, our book should reflect a composition more aligned with our target customer base, with greater than 50% residing in non-California states. While California will always be our largest market, we are looking to accelerate profitable growth in other states. Accordingly, the restructuring initiative we mentioned is designed to lower our expense ratio and enhance overall price competitiveness. Additionally, we are in the process of launching a new personal auto product in our non-California states. This new product includes modernized contracts, more sophisticated pricing, and a seamless agent quoting experience. The primary goal of this new product is to improve competitiveness across the portfolio through better rate-to-risk matching. We have been piloting this product in Arizona and Oregon with early production and segmentation results meeting our expectations. We are currently in advanced discussions with the Florida and Texas Departments of Insurance, with the goal of the product going live in both states within the next few quarters. Together, a lower expense ratio and enhanced pricing precision are expected to support profitable growth in our non-California markets. In commercial auto, underlying margins remained strong while producing double-digit policy growth. We continue to be optimistic about the profitable expansion of this business. We have a series of differentiating competitive advantages that have driven consistent and predictable results. With that said, we are opportunistically increasing rates where justified, with a specific focus on addressing liability cost increases. Overall, this business remains well positioned, and we are confident in our ability to profitably grow. In conclusion, we are focused on restoring California profitability and building a more diversified personal auto portfolio. We remain committed to our target market segments, disciplined execution, and continuous improvement of our existing capabilities to drive consistent value over time. I'll now turn the call over to Chris to cover the Life business.

Thank you, Matt, and good afternoon, everyone. Turning to our Life Insurance segment on Slide 13. The Life segment continues to deliver a consistent return on capital and reliable distributable cash flow. Earned premiums were stable year-over-year, and we finished the quarter with the face value of our in-force business at approximately $19.6 billion. Adjusted net operating income was $20 million in the quarter, driven by ongoing expense management. Importantly, we continue to experience favorable policy economics. Our average face value per policy increased modestly, while our average premium per policy issued rose 6%. To support continued growth and increased cash flow over time, we successfully launched an updated product portfolio and expanded the distribution of our liability offering. In closing, the Life business is performing well and continues to provide stable and consistent results to the overall portfolio. I'll now turn the call back to Tom to cover closing comments.

Thanks, Chris. To wrap things up, we know our results this quarter weren't where we want them to be. We believe in our businesses and in the markets we serve, and we are confident in our capabilities and competitive advantages to be successful. We're focused on executing the actions we've laid out today. This work takes discipline, and we're committed to making the improvements necessary to deliver stronger, more consistent performance. Before we close, I want to thank our colleagues throughout the organization for their hard work and commitment. They show up every day for our customers to deliver on our promises. Thanks for your time today, and we will now take questions.

Your first question comes from the line of Brian Meredith from UBS.

A couple of them here. First, I'm wondering if you could tell us what the profitability kind of breakdown is between California and then Florida, Texas. Just to get a sense of what the profitability looks like in your non-problem state.

California's combined ratio is around 105%, while Florida and Texas are within the target combined ratio of 95% to 97%. The main profitability concern, as we noted earlier, is that the earned rate in California needs to catch up to the BI cost. The profit issues are primarily driven by California, while the other states are performing relatively well.

Okay. That makes sense. And then I guess the next question, Matt is, why are you shrinking in the other states right now if your profitability is fine?

The profitability is strong regarding pricing. In Florida and Texas, the markets softened significantly last year, and we wanted to make sure that the benefits of tort reform in Florida were sustainable. We didn't want to be overly aggressive with our pricing. Additionally, as we discussed last quarter, we need to improve expense efficiency to make our products more competitive. We made some progress in that direction during the third and fourth quarters. Following our pricing adjustments, we observed a notable increase in new business, which is promising. We stabilized our policies in force in Florida and are experiencing steady growth in Texas. As mentioned in our prepared comments, we're planning to launch a new product in the next quarter or two, which should enhance our competitiveness and boost our policy production.

Great. And then one more quick one, if I could. Commercial auto, I'm just curious, given the consistent adverse development you've been seeing, how comfortable are you with current year profitability and the fact that that's actually one area that's growing?

Yes. So current year profitability, I'll just take a step back for a second. The segments that we focus on, we stay away from the nuclear verdict segments, the long-haul trucking, the dirt, sand, gravel. We generally have a fair mix of limit profile that's evenly spread across large limit to small limit. Artisan contractors, landscapers, delivery, that's really where we focus. From an underlying perspective, we feel confident that we're getting the pricing and we have the rate adequacy. That said, again, in the prepared comments, we are appropriately opportunistic in terms of strengthening our rate position, specifically on BI, where we can justify it. So we feel good about our adequacy. Underlying performance has remained very consistent there, and we continue to opportunistically take rate where we can support it.

Your next question comes from the line of Andrew Kligerman from TD Cowen.

I need a little help with kind of a roadmap, if you will, in personal auto. So if you're starting with 110 underlying combined ratio. And then maybe I could take off the table 4 points from the Florida refund. So then I'm at 106. And then I think Brad mentioned some seasonality. So maybe there's another point or two. So I want to make sure, a, am I at the right starting point of like maybe more normalized at 105? B, given 70% of the book is in California, how soon can you get that fixed? How can you get California to that kind of targeted 95-ish that you're seeing in Florida and Texas? And with that, we saw a PIF decrease of 7%. I was kind of surprised premium dropped more than that at 9-plus percent. So bottom line, how soon can you get to normal on that combined ratio? And what's likely to happen with PIF? Should we see more quarters like the one we just saw with PIF down 7%?

So this is Matt again. Thanks for the question. I just want to first comment on the rate activity in California. So we saw severity pop higher than what we had initially priced to in our FR filing. Immediately, we took new business non-rate actions and underwriting actions to make sure we weren't putting unprofitable business onto the books. We filed with the Department of Insurance for a 6.9% rate increase. That said, the filing hits bodily injury much more significantly than that. We had redundancy on our metal coverages. And so we're hitting bodily injury pretty heavily north of 40 points of rate that we're looking to get approved. We believe we're in the final stages of approval. We have good back-and-forth dialogue. We had a conversation with the department even this morning talking about that. We will hope to get that effective as soon as we can. And 100% of our policies in California are 6-month policies. And so rate will earn in over a 12-month period and will accelerate over that time to the file levels that we're hoping to get effective ASAP.

And Andrew, this is Brad. I know you're looking at doing your modeling. You're starting off at the right point, the 105-ish combined ratio on the personal auto business. When you think about what Matt is talking about, some of it is in our control and some of it's not. We can respond very quickly to the regulator. We can work through the process with them as effectively as we can, but we're waiting for that approval. As we wait for that approval, we still have severity trends each quarter. So if you have a 6-point severity trend year-over-year or an 8-point severity trend, you pick it. You've got some headwinds until we get that rate approved and it becomes effective in the marketplace and then it's earned in. So it will be some time before you start marching back towards that mid-90s combined ratio. It's highly predicated on getting that rate, one; and two, how we're managing the claims process related to the liability coverages. There, as we've talked about in the past, it's all BI and loss costs are ballooning mainly due to higher attorney attachment rates and higher claims selling at limit. And so we're working on that process. It's very sensitive. As you know, a rep claim is 4 or 5 times more expensive than an unrep claim. And so we're working through that process, enhancing that as well as working on our underwriting to mitigate frequency to bring down overall loss cost.

That was very helpful. Part of that question was about the decline in PIF. It seems like PIF will need to keep declining until you actually get those rates approved. Once you have those rates approved, you might not be as competitive, so PIF could continue to decrease. I just wanted to clarify my understanding of that part of the question. Am I thinking about this correctly?

You're generally thinking about it the right way, Andrew. We anticipate further declines in California, while expecting some growth in Florida and Texas due to the reinvestment we've made in those states. Later in the first half of the year, around the second quarter, we plan to launch a new product aimed at enhancing competitiveness. This product is currently in late-stage negotiations with regulators. However, I don't expect to see growth in California during the first quarter. I do anticipate additional growth in Florida, as we've observed some stability there at the end of the year, and we actually saw sequential growth in Texas on a quarter-over-quarter basis.

And then just the last question. The commercial auto prior year development showed an adverse development of 3.8 points. I think this trend started to turn adverse about 6 or 7 quarters ago. So my question is, and I know Brian touched on this earlier, but it seemed like last quarter you finally gained control over it. So what is different this time that gives you confidence that we won't see another adverse prior year development next quarter or the quarter after?

Great question, Andrew. The adverse development is primarily due to large losses from accident years 2023 and earlier. As we progress, the number of claims has decreased, particularly from accident years 2020 through 2023. I believe we are in a good position, but adverse development can always present surprises, despite our efforts to reserve as accurately as possible. I think we've captured most of that adverse development. Looking ahead to accident years '24 and '25, as I mentioned earlier, we adjusted our reserving practices for large losses in mid-'23. The trends I am seeing for '24 and '25 appear favorable, suggesting we have managed most of the issues from '23 and prior, with '24 and '25 looking significantly better than previous accident years.

Your next question comes from the line of Paul Newsome from Piper Sandler.

I would like you to elaborate on the Florida situation, specifically regarding the potential rate filings. You have reported very strong profitability there. Will you need to lower rates as a result? Should we anticipate a decrease in profitability going forward? Is a reduction in your profitability run rate necessary, or is that already reflected in the current run rate?

Great question. This is Matt. Like I said earlier, we wanted to ensure that the benefits of tort reform were durable. It's a stroke of the pen that things can reverse back on you. So we want to make sure they were durable. Additionally, once we saw that the performance was sticking, as we were looking to file rate in the marketplace, you have to with the OIR, the Department of Insurance there, justify decreases as well as increases, right, the same level of scrutiny. And so had we taken rates down dramatically this year, which, by the way, would have put noneconomical business on from a pricing perspective, yes, we could have mitigated a little bit of the refund, but we would have put a cohort of business on the books that was uneconomical, right? Because you had such good periods, performance periods over the 3-year waiting. And so we made the decision not to make that rate investment. It was a good trade economically for us. But as we march forward and we have the ability to support rate adjustments, which we are doing now, we're making those pricing changes, and we're driving the production that we feel good about on a vintage basis.

So to clarify the mid-90s combined ratio you mentioned to Brian in Florida, does that incorporate current rates or rates that will be filed soon?

That does not include future rates. Those reflect performance as of today. Pricing is determined on a prospective basis, which involves taking your current underlying performance and projecting it forward based on expected trends, validated by the Department of Insurance, from which you establish your rates based on that outlook.

There are no further questions at this time. I will now turn the call over to Tom Evans. Please continue.

Thank you. We appreciate everybody's time today and your continued interest in Kemper, and we look forward to continuing the conversation with you when we release our first quarter results in 12 weeks or so. So take care, and thanks for your time.

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