Kemper Corporation Q2 FY2026 earnings call

Core Strategic Priorities

• Restoring profitability is the company's top priority; profitability is a prerequisite for sustainable growth, and growth will only be pursued once profitability targets are met.
• Disciplined growth: Even for high-performing segments like commercial auto, management will prioritize long-term profitability over near-term top-line growth, implementing intentional adjustments to ensure all growth is profitable.

Organizational Changes

• The P&C business was realigned to improve accountability and execution speed: Underwriting, pricing, product, and claims functions are now led by a single PNC leader, Eric Kepler, a non-standard auto veteran. This change was driven by a need to align claims with core business functions to improve performance.
• New industry veteran Tony DeSantis joined the board of directors, bringing 40 years of industry experience including 10 years in non-standard auto.

Operational Progress

• Personal Auto: Rate and non-rate actions have delivered sequential improvement in combined ratio and reduced California exposure; rate increases have taken effect and additional filings are pending.
• Commercial Auto: Continued strong underlying performance, but successive quarters of prior-year adverse reserve development have prompted new rate increases and tighter underwriting standards to improve long-term reserve stability.
• Restructuring and cost savings: Cumulative annualized run-rate savings from the ongoing restructuring program now exceed $80 million, an increase of $20 million from last quarter, contributing to lower expense and loss adjustment expense ratios.
• Capital position: The balance sheet remains strong, with $766 million in holding company liquidity. Insurance subsidiaries are well-capitalized, and neither the goodwill impairment nor surplus note allowance affects statutory capital, holding company liquidity, or debt covenant compliance. Net investment income for the quarter was $105 million, with stable portfolio performance.

1. Specialty Auto Segment (includes Personal and Commercial Auto):

• A $460 million non-cash goodwill impairment was recorded in this segment during the quarter. Post-impairment, $570 million of goodwill remains on the balance sheet for the segment.
• Normalized underlying combined ratio improved 0.8 percentage points sequentially to 102%.
• Personal Auto sub-segment: Normalized underlying combined ratio improved 1.3 percentage points sequentially to 105.2%, driven by stronger underwriting performance and expense discipline. California's share of the personal auto portfolio declined 2.5 percentage points in the quarter, with a 10% sequential drop in policies-in-force (PIF) as the business reduced exposure to the unprofitable market.
• Commercial Auto sub-segment: Delivered strong underlying performance with an underlying combined ratio of 93.7%, and PIF increased 9.2% year-over-year. Reported results were impacted by $17.7 million in prior year reserve development, marking five consecutive quarters of adverse development for commercial auto.

1. Life Segment:

• Delivered solid quarterly results with $18 million in net operating income.
• Earned premiums increased to $103 million year-over-year, and average premium per policy rose 5.4% year-over-year, driven by pricing, underwriting, and distribution initiatives. The segment continues to deliver stable earnings, consistent cash flow, and business diversification, supported by favorable mortality and lapse experience and higher net investment income.

• Management did not issue formal numerical full-year guidance, but provided directional forward guidance:
• Personal Auto: Sequential improvement in combined ratio is already visible, and management expects continued gradual improvement in profitability over the coming quarters as approved rate increases take effect and non-rate exposure reduction actions continue to impact results.
• Commercial Auto: New rate actions and tighter underwriting will temper near-term PIF growth, but management expects these actions to deliver stronger, more consistent long-term profitability for the segment.
• No formal timeline for resuming PIF growth in California; growth is conditional on achieving clear profitability or a clear line of sight to profitability, rather than being time-bound.

• Personal Auto in California: Persistent underperformance driven by market concentration, difficulty securing full required rate increases from regulators, and ongoing pressure on loss costs mean meaningful work remains to restore profitability.
• Commercial Auto reserving: Five consecutive quarters of adverse prior-year reserve development, concentrated in bodily injury coverage in the highly litigious California market, with rising claim defense costs creating ongoing reserve uncertainty.
• Goodwill: A continued sustained decline in Kemper's share price or further challenged operating results could trigger additional goodwill impairment charges for the remaining $570 million of goodwill in the specialty auto segment.
• Kemper Reciprocal Exchange surplus notes: The reciprocal has not been profitable, leading to a $16.6 million after-tax credit loss allowance on the company's holdings of its surplus notes; the remaining $15 million in surplus notes could face further write-downs if the exchange's performance does not improve.
• Uncertainty around the reciprocal exchange strategy: The future structure of the reciprocal exchange and any potential move to move additional business into the entity is still under review, creating near-term strategic uncertainty.

Q: What organizational and operational changes are being made to pricing and underwriting, particularly for the unprofitable California personal auto market? / A: Management notes that prior efforts on pricing and underwriting were already effective. The key organizational change was aligning claims functions with other P&C business units to improve end-to-end performance. Management has already implemented aggressive rate filings in California, slowed new business growth in adverse exposure areas, and cut enterprise-wide expenses, which has already delivered visible sequential improvement. A 5.5% average rate increase took effect in Q2, with another rate increase filed. California PIF fell 10% sequentially as non-rate actions reduced exposure. We are already seeing progress from current actions.

Q: What triggered the $460 million goodwill impairment, and could additional impairment occur in future quarters? / A: The impairment was triggered by a sustained ~50% year-over-year decline in Kemper's share price, which required a mandatory quantitative goodwill impairment test for the specialty auto segment. The impairment calculation used both discounted cash flow and public market valuation approaches, which showed the segment's carrying value exceeded its fair value. The impairment does not impact operations or cash flow. A further sustained share price decline or ongoing operating challenges could lead to additional impairment, but management is comfortable with the remaining $570 million of goodwill on the balance sheet, and no impairment was required for the life segment.

Q: What is the current status of the Kemper Reciprocal Exchange surplus note write-down and the reciprocal strategy initiated by prior management? / A: Kemper recorded a $21 million pre-tax write-down (a $16.6 million after-tax charge) on the surplus notes because the unprofitable exchange could not support the full value of the notes, leaving $15 million of surplus notes outstanding. The new CEO has only been in place for 60 days, and has focused primarily on restoring profitability to the core business. The reciprocal strategy is still under review, and the company will communicate any decisions on the future of the reciprocal in due course.

Q: How should investors think about the timeline for returning to profitable PIF growth in California, given that double-digit total rate increases are needed and only incremental increases have been secured so far? / A: Resumption of PIF growth in California is conditional, not time-bound: growth will only restart once the business has profitability or a clear line of sight to profitability. Management needs a total double-digit rate increase; a 6.9% increase is already filed with regulators, with an expected effective date later this year, and cost-cutting will also help close the remaining gap on profitability needs. Competitors are also filing large rate increases in California, which supports the company's filing case. The sequential decline in combined ratio in Q2 (a typically seasonal weak quarter for Kemper) is a positive sign that current actions are working.