Kemper Corporation 5.875% Fixed Q4 FY2025 earnings call

Management Statement and Operational Highlights

• Context and Challenges: Specialty auto faced challenges due to structural changes in key states (e.g., California's minimum liability limit increase since 1967) and a competitive Florida market post-tort reforms, leading to refunds and pricing pressures.
• Initiatives: Priorities include restoring profitability in specialty auto, reducing earnings volatility via portfolio and geographic diversification, and improving execution/efficiency through restructuring. Restructuring initiatives have a cumulative annualized run rate savings of ~$33 million.
• Auto Business Actions: Working on restoring California profitability, enhancing claims processes, diversifying the personal auto portfolio, piloting a new product in Arizona and Oregon with plans to launch in Florida and Texas, and increasing rates in commercial auto where justified.
• Life Business: Stable results with an updated product portfolio and expanded distribution, contributing to consistent returns and cash flow.

Segment Performance

• Specialty Auto: Fourth quarter results were pressured by elevated claims severity in California and Florida statutory refunds. Adjusted for Florida refunds, the underlying combined ratio was 101%, with personal auto at 105% and commercial auto relatively stable at 90%. Policies in force and written premium declined 7.3% and 9.3% year-over-year, respectively.
• Life Insurance: Delivered solid performance with earned premiums stable, face value of in-force business at approximately $19.6 billion, adjusted net operating income of $20 million in the quarter, and average premium per policy issued rising 6%. The life business provides stability and diversification within the portfolio.

Guidance

• Short-term: Focus on restoring specialty auto profitability, executing expense initiatives, and managing near-term pressure from claims severity and refunds.
• Long-term: Positioning for consistent profitable growth through diversification and improved operations, with reinsurance renewal aligning with current risk profile.

Risks

• Market and Regulatory: Structural changes in key states impacting loss cost predictability, competitive Florida market post-tort reforms leading to refunds, and social inflation/legal system abuse affecting loss costs.
• Execution: Delays in regulatory approvals for rate changes in California and product rollouts in other states could impact profitability and growth.

Question and Answer

Q: Profitability breakdown between California, Florida, Texas A: California combined ratio is ~105%, while Florida and Texas are in the 95%-97% range. Rate increase filing in California is in final stages and expected to earn in over a 12-month period.

Q: Timeline to fix California combined ratio and PIF A: Rate increase in California expected to be effective soon, PIF decline due to non-rate actions and underwriting, with potential growth in Florida and Texas post-product rollout.

Q: Florida rate filings and profitability A: Aimed to ensure tort reform benefits are durable, pricing done on prospective trends with the Department of Insurance.

Q: RBC ratio and capital allocation A: RBC ratio of 230 is within normal ranges, capital available includes holding company and legal entity capital, with focus on organic growth rather than immediate capital injection.

Q: New personal auto products and rollout A: Piloted in Arizona and Oregon, performing well, with plans to launch in Florida and Texas in the next few quarters after regulatory approvals