Earnings Call Transcript - KMPR Q2 2025

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to Kemper's Second Quarter 2025 Earnings Conference Call. My name is Constantine, and I will be your coordinator 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.

Michael Anthony Marinaccio, Vice President of Corporate Development and Investor Relations

Thank you. Good afternoon, everyone, and welcome to Kemper's discussion of our second quarter 2025 results. This afternoon, you'll hear from Joe Lacher, Kemper's President and Chief Executive Officer; Brad Camden, Kemper's Executive Vice President and Chief Financial Officer; and Matt Hunton, Kemper's Executive Vice President and President of Kemper Auto. We'll make a few opening remarks to provide context around our second quarter results, followed by a Q&A session. During the interactive portion of the call, our presenters will be joined by Chris Flint, Kemper's Executive Vice President and President of Kemper Life; Duane Sanders, Kemper's Executive Vice President and Chief Claims Officer for P&C; and John Boschelli, Kemper's Executive Vice President and Chief Investment Officer. After the markets closed today, we issued our earnings release, filed our Form 10-Q with the SEC and published our earnings presentation and financial supplement. You can find these documents in the 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 actual 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 2024 Form 10-K and our second quarter earnings release. This afternoon's discussion also includes non-GAAP financial measures we believe are meaningful to investors. In our financial supplement, earnings presentation, and the earnings release, we have 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 will now turn the call over to Joe.

Joseph Patrick Lacher, President and Chief Executive Officer

Thank you, Michael. Good afternoon, everyone, and thank you for joining us today. I'm pleased to report that we delivered another quarter of strong underlying operating results. This was led by our Specialty Auto business, which once again produced a solid underlying combined ratio and meaningful year-over-year PIF growth. Before we dig into the specifics of our results, I'd like to provide some context around the overall auto market competitiveness and more specifically, the specialty auto segment. I believe we're all aware that there's been a hard market for auto in general. Over the first half of this year, there's been clear evidence that markets are softening and reverting to more normalized conditions. As most carriers see combined ratios recovering to more acceptable profitability levels, they're not taking major rate increases. In some cases, they're decreasing rates and increasing underwriting appetite to more aggressively compete for new business. The result is a combination of reduced consumer shopping and more available options when they do shop. Accordingly, the high levels of growth seen by the strongest players are naturally normalizing to more traditional levels. Most of us in the industry think and talk about hard, normal, and soft market conditions. These descriptions work overall for commercial lines as well as the standard and preferred personal auto market, but they don't really work for the specialty auto segment. As I stated in the past, within specialty auto, you generally see either a hard market or a more normalized market. Overall, we don't typically experience a traditional soft market because of our segment's unique characteristics. First, there are many smaller competitors who only operate in a few local geographies. Second, the speed of loss development is typically faster than the standard market. And third, customer policy lifetime tenures are much shorter than the standard market. The combination of these characteristics has several implications. You can't recover short-term irrational pricing over the lifetime of a customer. Aggressive pricing is seen in results more rapidly and no single competitor can typically soften the overall market with irrationally aggressive activity. In specialty auto, we may experience short-term softness in select geographies, but in general, it does not last long or impact the overall market. Recall our competitive advantages. We deliver a low-cost value proposition tailored to our unique customer needs. We bring a distinct scale advantage and a deep understanding of our market. This enables us to deliver leading differentiated product sophistication, claims effectiveness, and ease of use. We are confident that our competitive advantages will continue to produce attractive long-term profitable growth in a more normal market environment. With this as a backdrop, let's move to Page 4 and jump into this quarter's financial results. We delivered a return on adjusted equity of 15%, adjusted book value per share growth of 14% year-over-year, and an all-time high trailing 12-month operating cash flow of nearly $600 million. Our core businesses continue to perform very well. Specialty Auto generated a 93.5% underlying combined ratio while producing 8% year-over-year PIF growth and earned premium growth of 17%. Our Private Passenger Auto business produced an underlying combined ratio and year-over-year growth better than long-term norms but was somewhat off the hard market highs. Our Commercial Auto business continued to perform well and produced an underlying combined ratio of 90% while growing PIF by 18%. Here, we reported adverse prior-year development of approximately $19 million, which was driven by the general effect of social inflation. When viewed over a rolling 4 or 8 quarter basis, this business consistently produces attractive combined ratios and growth, and is a source of continued reliable strength. The performance of our alternative investments negatively impacted both our Specialty Auto and Life segments. This quarter, we had some modest noise, which I generally categorize as consistent with the broad marketplace investments volatility. We continue to maintain a high-quality investment portfolio, and Brad will get into the specifics around this shortly. The business fundamentals underlying our Life segment remain stable. The business continued to produce a strong return on capital and distributable cash flows. Lastly, we continue to execute on our multi-quarter balance sheet strengthening. Last quarter, we retired $450 million of debt, bringing our debt-to-cap ratio near our long-term target and our cash flow from operations hit an all-time high. With a strong balance sheet and healthy liquidity, we've repurchased $80 million of common stock since April 1. Given our expectations around future growth and strong operating metrics, the Board approved an additional $500 million of repurchase authorization, bringing the total available to $550 million. Brad will discuss our financials and share repurchases in more detail. Overall, we're pleased with our second quarter results. With that, I'll turn the call over to Brad.

Bradley Thomas Camden, Executive Vice President and Chief Financial Officer

Thank you, Joe, and good afternoon to everyone. I'll begin with our financial results on Page 5. For the quarter, we reported net income of $72.6 million or $1.12 per diluted share, and adjusted consolidated net operating income of $84.1 million or $1.30 per diluted share. These results led to an attractive return on adjusted equity of 14.9% and growth in adjusted book value per share of 14.3% year-over-year. As Joe discussed, our businesses continue to deliver strong underlying performance. Specialty Auto produced strong growth in policies in force and earned premium, and the Life segment continues to provide steady returns. Overall, our core businesses are performing well, but this quarter, our results were impacted by a few infrequent items. First, Specialty Auto recorded $14 million in adverse prior-year development driven by a $19 million reserve increase in our Commercial Vehicle business. This was primarily related to bodily injury losses. Second, volatility in our alternative investment portfolio pressured net investment income. Let's turn to Page 6 to discuss the investment portfolio in more detail. Quarterly net investment income totaled $96 million, coming in below expectations due to lower returns from alternative investments. Not surprisingly, performance in this asset class can be volatile. Valuation gains tend to align with marketplace deal activity, which slowed in the second quarter amid broader macroeconomic pressures. As market conditions stabilize, we expect alternative investment performance to improve in the coming quarters. The core portfolio, which excludes alternatives, continues to perform well, delivering $98 million of net investment income this quarter. Overall, we continue to maintain a high-quality, well-diversified investment portfolio. As the investment portfolio grows and with favorable new money rates, we anticipate net investment income to rebound in the second half of the year, averaging approximately $100 million to $105 million per quarter. Moving to Page 7. Here, we highlight the strength of our balance sheet and significant financial flexibility. We maintain $1.1 billion in available liquidity and continue to have well-capitalized insurance subsidiaries. Our debt-to-capital ratio stands at 22.7%, aligning closely with our long-term target. Notably, we generated $587 million in operating cash flow over the past year, marking an all-time high for the company. Given our strong financial position, let me remind you of our capital deployment priorities. First, we utilize capital to support organic growth. Next, we will fund inorganic opportunities to enhance our platform. And lastly, we will return excess capital to shareholders. As Joe discussed earlier, the Specialty Auto segment is transitioning to a more normal marketplace with attractive but somewhat slower profitable growth opportunities. This evolving environment will require less capital to fund organic growth. With significant financial strength and flexibility and the belief our stock is trading below intrinsic value, we repurchased $80 million of common stock since April 1, leaving $50 million available under our current authorization. This week, the Board approved an additional $500 million share repurchase authorization, bringing the total amount for repurchase to $550 million. This will enable us to deliver on our capital priorities in this environment. That said, we have no preset timeline for share repurchases and plan to execute on them opportunistically. Finally, I want to reiterate that we're well positioned for sustained profitable growth. The strategic investments we made over the past 5 years have strengthened our capabilities and reinforce our confidence in driving shareholder value.

Matthew Andrew Hunton, Executive Vice President and President of Kemper Auto

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

Joseph Patrick Lacher, President and Chief Executive Officer

Thank you, Matt. Turning to our Life business on Page 9. As noted earlier, the underlying business continued to generate stable operating results. Mortality and persistency remained in line with historical trends, and the Life business continues to generate strong return on capital and distributable cash flows. Turning to Page 10. In closing, I'd like to reiterate our highlights for the quarter. First, Kemper delivered solid operating results with an adjusted ROE of 15% and year-over-year adjusted book value per share growth of 14%. Specialty Auto continued to produce strong underlying results with solid year-over-year PIF growth and an underlying combined ratio of 93.6%. Our competitive advantages continue to give us confidence in our ability to navigate the normalization of the auto market. And finally, our capital and liquidity position provides significant financial flexibility. Our debt-to-cap ratio is near our long-term target range. Operating cash flows hit an all-time high. We repurchased $80 million of stock since April 1 and now have the authorization to repurchase up to another $550 million. I want to take a moment to thank our entire Kemper team for their efforts. These results would not be possible without their commitment and hard work towards achieving our goals. We remain confident in our ability to create long-term shareholder value. With that, operator, we may now take questions.

Operator, Operator

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

Andrew Scott Kligerman, Analyst

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

Joseph Patrick Lacher, President and Chief Executive Officer

Sure, Andrew. This is Joe. I'll address those points. Let's break them down. The difference between PIF and written premium is primarily due to geographic mix, and there haven't been any significant changes in premium rate filings. Some geographies have seen minor shifts, but nothing material. I see this as more of an anomaly. Historically, we’ve emphasized year-over-year PIF growth rather than sequential quarter comparisons due to seasonal fluctuations in Specialty Auto. We highlighted sequential quarter PIF growth during our transition from decline to growth to signify a significant change, rather than using a rolling four-quarter view. We moved past that, as mentioned last quarter. If you focus on sequential quarter PIF growth, you might get caught up in seasonal variations. Matt pointed out that the latter half of the year in Specialty Auto has distinct seasonality compared to the first half, which has been consistent for the past two decades and is expected to continue. This is not a sign that we are slowing down; we are still proactive and anticipate profitable growth. The current PIF trends reflect what many competitors are experiencing. The industry is transitioning from a hard market to a more standard one. The double-digit growth seen over the past year to year and a half is not sustainable long-term, but rather an abnormality of a hard market. Progressive’s recent call reinforced this point, and given that we compete in the same markets, other carriers are becoming more active, which will lead to a normalization of that rapid growth. We expect, as we’ve communicated to investors, that in a typical Specialty Auto environment, there will be low to mid-single-digit year-over-year PIF growth, generally in the 3% to 7% range depending on fluctuations within 90-day periods. We anticipate maintenance rates will continue to improve, and as we’ve indicated, combined ratios will likely stabilize within the 93.5% to 94.5%, or up to 95% range, consistent with our historical performance. To reiterate, if we consider pre-pandemic years, such as 2017 through 2020, a 93.5% combined ratio and 8% PIF growth were regarded as strong results. These metrics are attractive for a long-term stable market, albeit they appear atypical compared to previous high numbers, which we've indicated will not endure. This normalization in the market and the entrance of more competitors is not indicative of us slowing down.

Andrew Scott Kligerman, Analyst

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

Joseph Patrick Lacher, President and Chief Executive Officer

I'm going to separate those into two distinct categories. Our usual combined ratio guidance is around 93.5% to 95%. If it exceeds 95%, we don't usually become overly concerned for a quarter or two. We set a firm threshold at 96%. In this industry, there can be fluctuations of 50 to 70 basis points in any quarter. I expect us to remain within that range and do not have significant concerns about one quarter being at the upper limit. I anticipate it will stay within that zone. The second point concerns the $19 million we mentioned, primarily in Commercial Vehicle. We observed a slight increase in various accident years, likely attributed to what we've termed social inflation as an industry. We made some balance sheet adjustments in light of this unusually active quarter. This includes adjustments in our current accident year estimates for both Commercial Vehicle and Private Passenger Auto to account for those conditions. So, for the combined ratio in Private Passenger Auto, we noticed some typical seasonality in the second quarter, which is normal for it to rise slightly. We also adjusted our current accident year upward to consider that environmental factor. We believe we are aligned correctly there. Could there be some additional fluctuations in any quarter? Yes, perhaps. However, we noted in Commercial Vehicle that every 4 to 8 quarters, we might see one or two quarters with a noticeable spike. When viewed on a rolling 4 to 8 quarter basis, this is a highly appealing business for us. We are quite confident in it and respond appropriately to any unusual fluctuations in a quarter, but this does not alter our fundamentally positive outlook for that business.

Operator, Operator

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

Mitchell Rubin, Analyst

This is Mitch on behalf of Greg Peters. So I wanted to ask about the higher minimum limits in California. And I was wondering if you could quantify the impact on premiums this quarter.

Joseph Patrick Lacher, President and Chief Executive Officer

Sure. The minimum limits in California would have had a similar impact to what we observed in the first quarter. Our policies are typically 6-month policies, so the effects have generally been accounted for in our book by now. This is the last quarter in which that particular anomaly will take place. Mitch, I apologize, but we will need to get back to you with the specific number. While I have a rough estimate in mind, I'm unsure of the exact figure. We will follow up with you. The situation aligns with what we experienced in the first quarter, and since our policies are nearly all 6-month in California, the effects have been absorbed.

Mitchell Rubin, Analyst

All right. My follow-up is on retention and how that's been differing by state.

Joseph Patrick Lacher, President and Chief Executive Officer

Yes, Matt, why don't you go ahead and take a shot at that.

Matthew Andrew Hunton, Executive Vice President and President of Kemper Auto

Yes, Mitch, the texture varies a bit by state. We earlier discussed California, where the market continues to be relatively strong. We're experiencing limited supply compared to historical trends there, so retention is generally holding steady. In Florida, we're observing a slight decline in policy life expectancy, which is typical as agents reassess their portfolios due to changing carrier premiums, but this is not significantly impacting our outlook for that state. Texas remains stable, with less shopping in the market recently, which should ease as the business progresses. Overall, retention has been quite stable.

Operator, Operator

The next question is from Paul Newsome from Piper Sandler.

Jon Paul Newsome, Analyst

One maybe follow-up on the adverse development. Was there anything besides just severity going up? Like was there any geographic pattern to it? Was there anything just purely liability-related things? Or was there some health care inflation in there? I think you said bodily injury. Just want to make sure we got all the pieces there on the adverse development.

Bradley Thomas Camden, Executive Vice President and Chief Financial Officer

Sure, Paul. This is Brad. Great question. Specifically in CV BI, where we're seeing the adverse development, it was in our large loss bucket, which is a very low frequency, higher severity coverage or loss bucket. It's important to articulate those items because it's not an underwriting issue. There's no significant increase in frequency. It's simply a result of social inflation over time. And these things tend to be 2 or 3 years old as they develop. In the more recent accident years, we strengthened the balance sheet as a result of that. So the business overall continues to perform extremely well, grew significantly year-over-year, and an underlying combined ratio in the low 90s, very strong overall. Just more episodic, large loss events. And as Joe said, there was more litigation activity in the second quarter than we've seen in the past.

Jon Paul Newsome, Analyst

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

Joseph Patrick Lacher, President and Chief Executive Officer

Yes, there's always some variation, Paul. We examine our adjusted return on equity because there is a significant amount of goodwill on the balance sheet, approximately 15%. This is a reasonably attractive position. I believe it can and has improved slightly over time, and it currently remains in a reasonable range with expected volatility. Additionally, there is a substantial share repurchase authorization from the Board. At $500 million, it matches the last two authorizations combined. When factoring in the remaining $50 million and the $80 million we've repurchased in the past 90 days, it represents about 16% of the company's current market capitalization. This presents a significant opportunity. We are confident in the returns from this business. We have a strong balance sheet and good liquidity, and we believe the stock is somewhat undervalued. Therefore, we plan to buy opportunistically and actively defend our position in the market, as we see unrecognized potential there.

Operator, Operator

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

Joseph Patrick Lacher, President and Chief Executive Officer

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

Operator, Operator

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