KEMPER Corp Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Backdrop Context: A volatile post-pandemic market led to initial losses, but non-rate actions were taken to restore profitability. Now, non-rate actions are being removed and the business is being guided back to traditional margins.
• 2024 Guidance: Expect to solidly beat the 10% ROE target for 2024. No update to annual guidance. Specialty auto has a long-term goal of a 96% or better combined ratio, with a drift towards this over 4-6 quarters.
• Financial Results: Net income was $75.4 million, ROE was 11.5%, and adjusted ROE was over 17%. Specialty P&C's improved combined ratio led to a 4.6% sequential PIF increase. Insurance companies are well capitalized with significant liquidity. Net investment income was impacted by a $15M real estate valuation adjustment but is expected to return to normal.

Segment Performance

• Specialty P&C: Produced an underlying combined ratio of 89.6%, a 4-point sequential improvement. Private passenger auto and commercial vehicle businesses had underlying combined ratios of 90% or better. Sequential quarter PIF increased by 4.6%.
• Life Business: Underlying fundamentals were stable, but negatively impacted by a valuation adjustment on a real estate investment. The business continued to generate consistent distributable cash flow.

Guidance

• Expect to solidly beat the 10% ROE target for 2024.
• No deteriorating trends are seen in the second half of 2024 that would meaningfully impact earnings.
• Specialty auto combined ratio is expected to drift towards the mid-90s over 4-6 quarters.
• Sequential quarter PIF growth is expected to moderate in the second half due to seasonality, but growth is anticipated to increase in 2025.

Risks

• Volatile market conditions post-pandemic could affect underwriting results.
• Commercial real estate market conditions may impact investment income (8% of the portfolio, over 80% liquid/short-term).
• Seasonality in the business could lead to fluctuations in PIF growth.

Question and Answer

Q: Additional market information on PIF growth geographies and guidance for the second half.

A: Matt Hunton discussed strong demand, geographic dynamics (California, Florida being key), and supply-side variations by market. Seasonal buying patterns lead to lower PIF growth in the second half.

Q: Combined ratio drift and new business penalty.

A: Joseph Lacher explained the drift towards a traditional 93-95% range, driven by new business penalty and removal of non-rate actions. Expect slight overshooting in 2025 due to loss inflation.

Q: Rate revisions and progress on non-rate actions.

A: Joseph Lacher stated about 75% of non-rate actions have been removed, with maintenance rate changes balancing coverage. Net investment income is expected to return to normal after the real estate adjustment.

Q: PIF growth seasonality and rate earned in.

A: Joseph Lacher broke down seasonality (less shopping in the second half) and year-to-date rate earned in, with remaining points to be earned in for the back half of the year.