Q3 2019 Earnings Call
Good afternoon, ladies and gentlemen, and welcome to Kempers third quarter 2019 earnings Conference call. My name is Chuck and I'll be your coordinator today at this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time as a reminder of the conference call is being recorded for replay purposes, our knowledge.
Introduce your host for today's call Christine Patrick.
<unk> Vice President Investor Relations Ms., Patrick you may begin.
Thank you Chuck good afternoon, everyone and welcome to Kemper's discussion of our third quarter 2019 resolved.
This afternoon, you'll hear from show locker, Kemper's, President and Chief Executive Officer, Jim Mckinney, Kemper's Executive Vice President and Chief Financial Officer, and Dwayne Standard Kemper's Executive Vice President and the property and casualty Division President.
I'll make a few opening remarks to provide context around our third quarter results and then we will open up the call afraid question and answer session. During the interactive portion of the call. Our presenters will be joined by John or Shelly Kemper's Executive Vice President and Chief Investment Officer, and Mark Green Kemper's Executive Vice President and life and Health Division President after them.
To close this afternoon, we issued our earnings release unpublished <unk> third quarter earnings presentation and financial supplement.
In addition, we filed our Form 10-Q with the I see you can find these documents on the Investor section of our website at <unk> Dot com.
Our discussion today may contain forward looking statement or actual results may differ materially from these statements for information on potential risks associated with relying on forward looking statements. Please refer to our 2018 Form 10-K as long as our third quarter 2019 Form 10-Q and earnings release.
This afternoon discussion also includes non-GAAP financial measures that we believe our meaningful to investors one such measure that I would like to highlight again, it's as adjusted for acquisition. It is clearly important to understand our reported results, including the impact the Infinity acquisition has to Kemper. Overall, however, investors have also expressed an interest.
In understanding the underlying organic performance of the combined businesses.
Since our as reported financial don't include Infinitys historical information prior to the closing of the acquisition and our current results include the impact of purchase accounting the underlying trends are not easily visible in an effort to provide insight into the underlying performance of the combined businesses. We also display our financials as adjusted for acquisition.
This view removes the impact of purchase accounting and includes historical Infinity information for periods prior to the closing of the acquisition more easily provide a meaningful year over year comparison.
In our financial supplement presentation and earnings release, we have defined and reconciled all non-GAAP financial measures to GAAP, where required in accordance with FCC rules. You can find these documents on the Investor section of our website, a kemper dot com.
Finally, all comparative references will be to corresponding 2018 period, unless otherwise stated I'll now turn the call over to Joe.
Thank you Christine good afternoon, everyone and thanks for joining us on todays call.
I'm pleased to announce yet another strong quarter financial and operational performance.
You can see this when looking at page for this quarter, we made $129 million had net income and $136 million should net income adjusting for the acquisition of Infinity, we shall see on the following slide.
These numbers are up 40% at 3% respectively.
This translates on a per share basis, <unk> dollar 91 and $2.01 respectively.
Additionally, this resulted in a 37% increase in tangible book value per share and a return on average equity excluding unrealized gains a 13%.
Overall, Kemper generated industry, leading organic growth, we maintain very strong margins and we strengthened our balance sheet.
Our strategy and business model continue to perform well.
The opportunity for expansion within our specialty auto business remains strong, which coupled with kemper's diversified business portfolio should continue to drive industry, leading topline organic growth well producing strong profitability and creating significant long term shareholder value.
Especially PNC segment reported very strong result, we generated 10% topline growth with accelerating sequential quarter policy in force growth.
We did this while maintaining an adjusted underlying combined ratio of 91% we continue to outperform our competition.
The strength of our model comes from a specialized and tailored focus on our target customers.
Staying nimble and expanding cost advantage and increasing product sophistication.
These three advantages are interconnected.
Our success amplifies these advantages and should enable future outperformance.
You can see evidence of this increasing strengthen our ability to generate growth across a more diverse set of geography.
This quarter, we had double digit profitable growth outside of California, and its accelerating.
Our combined company platform is created strong opportunities within specialty auto market and we expect that dynamic to continue.
A life and health business returned to a more normal level of earnings and delivered modest growth.
Stable cash flows and diversification benefits. It provides a kemper continue to enhance shareholder value.
Our preferred PNC business turned around continues despite all the positive changes we are introducing given the modest size as this business. We continue to expect a higher level of ongoing quarterly volatility and both underlying catastrophe results.
From a financial strength standpoint, we currently maintain roughly $830 million of available on committed contingent liquidity.
Liquidity, coupled with our current debt to capital ratio of 16.7% provides us with significant financial financial flexibility.
We also took action this quarter to further fortify our balance sheet through the contribution of roughly $55 million to our pension, bringing a liability was not fully funded range.
With that I'll hand, the call over to Jim to discuss the consolidated quarterly financial results in more detail.
Thank you Joe and good afternoon, everyone on the call.
Let's turn to page five to discuss the third quarter financial results.
This quarter was another solid quarter for Kemper with top Cortile result, leading to strong growth in earned premium adjusted consolidating net operating income per share and net income per share earned premium grew 7.8 person to 1.1 billion, excluding the impact to purchase accounting net income per share was flat and adjusted consolidate.
The net operating income per share declined 8%, which when normalized for one time discrete items would have increased 22 person we will discuss at this point in more detail on the next page.
These numbers, probably the ultimate shareholder value creation reflected in this quarter's 21% growth in tangible net book value per share, excluding net unrealized gains on fixed maturities and 20% return on tangible equity.
Turning to page six.
I'd like to remind you that the third quarter of 2018 was positively impacted by parcel satisfaction of an arbitration judgment and the benefit from tax reform.
Excluding those items and if you discreet items in 2619 adjusted consolidated net operating income grew by a robust 22%.
Moving to page seven.
Here, we isolate the key sources the volatility in our earnings adjusting for these sources the volatility our underlying operating performance continues to increase substantially over the previous year.
Combined company operating platform is helping to drive strong shareholder value creation.
This is largely a result of market share gains and strong profitability related to our Kemper Auto platform. In addition, we're pleased with the increase in life sales and the long term stability. The cash flows. This provides our operating model.
I'll now turn the call over to Duane to discuss the results of our PNC segments.
Thank you Jim and good afternoon, everyone, let's start with the specialty PNC insurance segment results on page eight our topline can James you see strong gross earned premiums increased to 783 million for the quarter up 10% over the third quarter of 2018 policies enforced increases.
1%, demonstrating kemper's, leading competitive position within the specialty auto market.
Our third quarter year to date as adjusted underlying combined ratio was 92% a one point improvement over the six months ended June 30.
As Joe mentioned earlier, we are outperforming the competition. We believe this is driven by the Threeg interconnected strengths of our model.
First our specialty market focused targets they come combination of nonstandard and Hispanic customers and customers in challenging geography, our deep understanding of their needs and the nuances that drives success in these markets provide a competitive advantage. We're also low cost provider focused on achieving expense efficiencies and effectively manage law.
Net loss costs, which are our products ultimate cost of goods. So this is combined with leading products to the staycation, which allows us to more accurately price within our specialty markets, where I'm hopeful fully realizing the benefits of our franchise as these distinct advantage <unk> advantages mutually strengthen each other and deliver assist.
Matic sustainable competitive advantage enable us to continued to drive industry leading results.
On page nine you can see the results of our preferred PNC insurance segment earned premiums were 191 million for the quarter growing 4% over the third quarter of 2018, primarily reflecting the impact of rate actions taken over the past year. The underlying combined ratio for the quarter was 95% up slightly from.
The third quarter of 28 gene.
Turning to catastrophes, many of our competitors reported elevated losses. This quarter. Our experience. However was relatively benign reporting 12 million in losses compared to 18 million in the third quarter of 2018.
This quarter is another example of what we've noted in the past based on the size and distribution of our book combining overall industry losses in market share is not a good predictor of architecture be results.
This quarter also included the benefit from the negotiated sale of our subordination rights from 27 gene in 2018, California, wildfires, which was recognized as 15 million in favorable prior year catastrophe development.
Well underwriting results in this segment remained below our profitability goals, we expect improved actions in claims pricing and underwriting will move us towards our desired results I'll now turn the call back to Jim.
Thank you Duane.
Our life and health divisions results on page 10 of the presentation.
Our continued focus on improving distribution capabilities resulted in earn premium growth of two person on.
This quarter the operating profit for the business returned to more typical levels, but the benefit expense ratio within a normal range of volatility.
During the quarter, we released 15 million in reserves related to ongoing outreach efforts and our life insurance policy payment claims process.
Turning to investments on page 11.
Our portfolio remains diversified and highly rated as demonstrated in the bottom left to the page looking at the chart on the upper left you can see the investment performance over the past five quarters. This quarter. We produced 92 million in net investment income largely in line with our performance in the third quarter of 2018.
Liquidity that our operating model creates from the life insurance business permits us to match fund PNC liabilities. The not result is a decrease in short term portfolio yield volatility and its corresponding impact on that investment income.
The pretax equivalent annualized book yield of 4.4% down from 5.2% not third quarter of 2018 is due to a shift in asset mix in connection with the addition of the infinity portfolio.
So we increased our investments in corporate owned life insurance. This contributed 3 million to the other income line compared with 1 million over the prior year.
This allocation enhances investment returns with attractive risk characteristics is an example of how we continue to evaluate all options to maximize shareholder value.
On page 12, we highlight our strong capital and liquidity position in the third quarter operating cash flows increased 22 million to 367 million compared to the third quarter of last year, our increased scale and disciplined operational and financial management continue to enable these results.
Turning our attention to the chart in the upper right. A page 12, you can see that our insurance groups are well capitalized.
In the upper left hand corner, we present parent company liquidity.
At quarter end, we had substantial financial flexibility with 169 million in cash and investments and 660 million in borrowings available from our revolver and our subsidiary.
Debt to capital ratio was 16.7% somewhat below our normal range in combination of all of these items provide substantial flexibility to support continued growth and shareholder value creation.
With that I'll turn the call back to Joe for closing comments.
Thank you Jim.
I'd like to take a moment to know the other press release, we issued today when I arrived at Kemper four years ago, we need to fix a number of things in the organization and you know the talent to get moving on those fixed as quickly.
Our green was one of the first people we brought onboard and he took on two core responsibilities, leading life and health Division and abroad business development role. We now reached the point or evolution, where each area will benefit from focused leadership as such I'd ask mark to assume a new position with responsibility for business development and reinsurance.
This role Leverages, Mark strong entrepreneurial background and many of the skills. He is developed over his career.
We'll continue to lead the life and Health Division well, we search for a leader in that role I.
I greatly appreciate marks efforts over the past three years and I look forward to continued success.
In conclusion this quarter demonstrated the continuation of our focus to build kemper's overall value our profile of specialized businesses continued to produce revenue growth solid earnings and attractive shareholder returns. Thanks to the ongoing efforts of our committed team. This quarter's results confirmed that our strategy and business model continue to perform well where it.
Standing kemper's, reaching our ability to serve specialty markets, but easy to use affordable when appropriate insurance and financial solutions now, we'll turn the call back to the operator to take your questions.
Thank you we will now begin the question and answer session to actually question. You May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble roster.
And our first question will come from Greg Peters with Raymond James. Please go ahead.
Good afternoon team I had a couple of questions.
First of all just stepping back from a big extra perspective, I think would be appropriate for your management team to weigh in on.
Some of the frequency and severity trends that we've heard others comment on both in California, It outside of California, and Joe maybe you could dovetail that with your comments and clarification around your growth outside of California in specialty PVC.
Sure Greg I'll take a shot at it and then then we'll see if anybody else wants to add on top of that and I'll do I'm almost in reverse order our growth outside of California has been a strategic focus of ours, it's not that we don't like California, we do like it we can.
And you to perform well there it's an important state for us and we continue to grow inside of California.
We saw a distinct opportunity to take the strength of our franchise.
And grow outside of California, and had been doing that we described that priority infinity transaction. After the infinity transaction, it's been a focus of the organization.
One of the things, we expect it might take a little bit of time after the transaction to fully realize some of the internal synergies we needed to get not expense synergies, but the capability synergies and we're seeing those those bear fruit and come to fruition and are excited about that that growth opportunity again outside of California.
It's got nothing to do with not liking the state.
Relative to I'm, sorry go ahead.
Is that it's the outside of California, sorry to interrupt you Joe that was around up I don't recall had Greg I had a shift in comments. So good yeah. I just wanted to clarify is that within existing geography values or do you are there new geography that's involved.
It's largely existing geography with the definition that they they were existing it it either Kemper infinity prior to the transaction, but you know in some cases they were relatively newer states.
We've got significant growth in Florida, and Texas. We've also got very significant growth in Georgia to lesser degrees, Louisiana, Arizona. Some other spots around that so we're seeing it it's not just one state all of those states had activity begun prior to our transaction with affinity infinity someone more.
A sizeable than others and and as such the smaller ones are having much bigger growth rates.
But it's more than one and.
I think that answered your question, yes, it does what youre going to do a little bit more frequency and severity aspect. So yeah frequency and severity in general we're seen similar similar trends to what people are describing other folks had described on frequency, we're seeing modest uptick on severity.
You know a little more in California, little more Andy I I'm, we're not particularly seeing anything that I would describe it as crazy outsized we've seen a lot of folks talk about social inflation.
And.
That's that's interesting lot of folks jumping on the bandwagon, we're just not seen it run through our numbers to the point, where we would have looked to coin afraid and blame it on something.
It's just a little normal normal uptick there that's running there, but we believe.
That perhaps if other folks are seen it maybe why we're not our our specialized focus might have a customer group, that's a little less exposed to it we've got a lower limits profile.
There may be any number of reasons the that have a seen something a little different but it wouldn't be something we would've poked at the highlight.
Got it.
Just another follow on on the specialty.
You know that the improvement was violent and and substantial.
I think somewhere in your comments one of you mentioned that possibility for volatility going forward and and also maybe you can dovetail that in my.
Comments around where are you on cost savings I think it's at 80% of your cost savings have been achieved et cetera [noise].
Okay. So help me understand Gregg said, either we got a little background noise or I got lost in your question I footwear. The volatility comment we were describing was relative to our preferred business.
Got it is smaller you what what were you asking about specialty.
The if it is there was a violent improvement in their results and so I guess ultimately what I'm looking for is the sustainability of these results going forward. So so which results are you specifically point and you're looking at the underlying combined ratio on specialty.
Yeah, that's exactly where I'm focus.
Hey, Greg and we highlighted this last quarter and I will highlight it again this quarter I think the way to read the numbers is to look at the year to date numbers for the loss picks and the other elements you've got a little bit of intra year development favorable entry year development, that's rolling through the quarter this quarter.
Doesn't you know overly change what our loss pick is for the entirety, you're you're seeing if you go to page 36 and 37.
The other supplement or 37 and 38.
Relatively in line with year over year result, and relatively in line with kind of first quarter picks so not a whole lot of volatility. It's just about how that intra year rolls through.
And really have put to put a really fine point on and Greg and the second quarter. We thought we were seeing a little bit of a temperature for the year you got a little bit of of intra year development from the first quarter and we are we were wrong and so you get the positive version of that in the third quarter I'm. So the year to date numbers really does the right way to look at.
That and if you think of those together, what you'd see it though a fairly consistent view on profitability throughout the year.
Right.
Got it.
Page 37, or 38, yet you're breaking up a little bit Greg can you restate that.
I think it's.
Yeah.
But those questions. Thanks.
37, and 38 will show you that that would your question.
Yeah. Thank you.
Greg There just to highlight your as adjusted numbers you know for the nine months or 92 five.
You know in 91 seven for the quarter. If you look at that relative to prior year of 92 six.
You know relatively thought when you're thinking about the specialty auto business. If you include CV and the results on a year over year basis, we've improved roughly one point a in terms of the total combined ratio.
Pretty static you.
And our next question will come from Paul Newsome of Sandler O'neil. Please go ahead.
Leases.
Just give a little bit more colour on the competitive environment.
Nonstandard auto business rose.
If there's a contrast between the two.
So you were a little thing Paul I think what you said was I'm looking for color commentary on the competitive environment on separately nonstandard in preferred and a recognitions they were likely different competitive environments and just confirming that yes, sorry about that so no problem no problem going you want to take a shot.
Yeah got it thanks, Joe So I'd say on the on the specialty side, you know I would first between the two I'd say there they're very different because your players in both those spaces or are primarily different players, but on the on the specialty side. It's it is a dynamic that changes across you know from state to state.
And you'll see you know.
We'll take Florida for example, you'll see some competitors that have not had good results are taking significant rate increases others that have done well you know introducing new products. So it there's a lot of variation across that but no no outside of maybe just a few no real large swings. It's I'd say, it's nuanced then it's a it's.
Marginal up and down and then of course inside the preferred space, you've got a lot of sophisticated players there and again based on limited distribution and the things that that Joe mentioned, where some of that social trend kind of activities taking place.
Might see a a little bit more than what you know what we're finding in where the specialty products or have the more limit distribution and may not be seeing as much of that that adverse impact.
<unk>.
Great and I'm.
Just a quick.
Did you.
Do you feel we book all the separation right so returns from the wildfires.
Piece that may come later.
No that's the full I'm not impact results that we're expecting to receive all.
Thank you congrats on the crude.
Hey, Paul just a touch just one second on into add a little bit to Duane we transition one thing that I think to highlight in terms of that competitive environment I'm in its dwayne kind of said relatively stable from what we've seen kind of in the past and the other I think what's important to point out is that our relative compare.
Additive strength as a company has increased during that period of time.
Both because of the scale that we have our loss cost management capability or products sophistication and just our overall cost discipline.
And then that resulted out as I think you're seeing us continue to be and increasing force a within side. This space and I think it's important to look at it on that relative basis.
Versus just purely what the competitive environment is.
On the tone.
Great. Thank you.
Our next question will come from Seth Rosenberg of you'd be S. Please go ahead.
Okay. Great. Thanks, guys couple of questions for you. So yeah, maybe this dovetails with what drivers asking in specialty on the frequency and severity, but looking at the results you hadn't commercial auto this quarter there very strong.
You're not seeing any of the the same trends that others are talking about in regards to attorney involvement and higher severity there maybe terminus what the Napa.
Yeah, I would say, yes, I think the the descriptive that we gave and as Joe kind of explain that that is consistent our profile. There too is very similar you know to what we've tried to what we ride on the specialty side. So you know I think it again, we're not immune to it but certainly.
The activity is is more prominent where you've got bigger limits and where we don't have fleet business. You know it's a one it's a two car it's an artisan contractor where the pickup trucks. So we're finding ourselves they don't end up in a pretty good spot right now again, I'm, not telling you where immune to it but they inform you everything we're seeing today.
We're not that's not showing up.
We manage the book Seth.
As much more like a personal lines book of business given that there one to sometimes three vehicles and we run it in operated that way, where some of the broader industry might look at commercial vehicle any thinking about as a big commercial auto policy, whereas there either fleets or there's bigger books and they're trying to do individual account underwriting and it's Joe.
In different way of selecting the risks pricing it limits profile and produces a different result, we're highly confident that we can continue to achieve these results because of the way, we're managing the business and selecting the policies in the customers and it just wondering is a different market then the guy who that you're.
When you just look at a stat line of commercial vehicle.
Got it makes sense and then it looks like it's small in terms of test count, but just thinking about the the sale if the classic auto book, how should we think about that moving forward I mean does that having any material impact on to the loss ratio versus expense ratio Max.
<unk>.
Minimally at all I mean, it it's a it's a 16 million dollar book, we Ah we seized to write new business No actually November 1st renewals will start to transition out March 1st and again, it's a it's a it's a it's a very minor a percentage of the you know to the to the book.
Overall.
I just wonder if I can find if I can follow on it the you're asking a great question and hang Duane highlighted it highlighted it well say to answer your specific question on sort of its impact on the numbers.
The bigger issues, just how do we think about things strategically.
We looked at that business and we said were pretty good at it we're making a reasonable margin, but when we looked at it we said it's not.
Not better with US then it would be somewhere else you know moving that business to haggerty, probably did a better job for customers, they're gonna do a better job with it overall and our ability to create a specialty there we weren't going to generate long term outsized growth and shareholder value creation I'm. So it was more of a hobby for us than a strategic focus so.
So it was time to what it thrive with somebody else the bigger item there is less what it does to our numbers in more how we think about the about the strategy.
Got it and mix excess.
And then just one last one if I can so I thought you made a point that different does that make up the buckets not really affect of to look at state geography is one thing about cat losses. So just maybe a early indications on how you guys just thinking about the the fourth quarter wildfires in California.
If this Duane yeah, I would say you know there within expectations.
No we're not seeing anything outsized there in terms of either current or size in terms of individual losses. So nothing nothing really to to report.
Okay, great. Thanks, Congrats core.
Again, if you have a question. Please press Star then one.
And our next question will come from Christopher Campbell of KBW. Please go ahead.
Hi, good afternoon gentlemen.
I don't Chris Hey, Thank God and yourself.
Wonderful Oh, alright, great. So quick question for you guys on the D.
MC.
<unk> expense ratio it looks like that's normalize and you guys aren't saying as much of the.
GAAP stuff in there year over year now should you know it looks more normal where I would expect it so it's like 17% to 18% like a good way, we should be thinking about that going forward.
Yeah, I think that's a reasonable expectation and into your point we highlighted.
Both at the time of acquisition and then in subsequent quarters that there was a really quick run off of kinda. The voba amortization just due to the overall policy life is the book of business as a whole I think you'll see that both again in pages 37, and 38 I think the.
<unk> expense ratios that you're referencing kind of that 17, 18% is a reasonable range to kind of think about what's a normal kind of expense load for us to concur.
Yeah, There's I think page 20 is well in the supplemental give you some insight on that too.
Okay, Great [laughter], Oh, I'm, sorry go ahead.
Note that was it.
Okay, Great and then I mean should be expand I mean, as you're growing that like what would be about the potential like upside for like you know a scale driven economy is on that number or is that is that pretty lean where you're at right now.
Chris I would highlight it.
You know fairly lean obviously there'll be additional dollars that we get but in terms of on a ratio basis. Its impact in you know thinking about you know an additional points or half point. If you just kind of thinking about a book of business. That's over $3 billion that'd be a $30 million plus number to kind of.
Move that point I think you should think about it more as kind of the incremental dollars that will add so if there's you know 510, you know overtime will you know accrue those things, but in terms of that having a half point point impact on the ratio I wouldn't I I'm not forecasting that I think you should really think about it.
That 17, 18% type range.
Said differently, Chris at this point, we think Thats, a very reasonable range and we've got attractive margins. If we were to find more expense savings in synergies, we would likely be deploying that into growing the business rather than expanding the margin because we believe that growing the business at those attractive margin gross earned.
Earnings per share in gross book value per share and creates more shareholder value.
Then then it would be to be pushing the margin down.
And when we do that that ratio may move around a little bit based on how we're dealing with pricing, but where we're at a point, where we believe shareholder value creation is by expanding his best served by expanding our growth.
These margins. So I would encourage you not to be trying to model that expense ratio going down because it's just not how we're thinking about driving the business.
Okay may as we work mixes of different things, but but the the primary goal is the growth piece of these margins.
Okay got it Nemo [laughter].
I'm sorry.
Okay, well, you know and and then you have dovetailing on the growth right. So the earned premiums are off.
70 million in that segment, but then the non cat loss ratio as our like you know the current accident year loss ratios are down 20, Bips now I would've expected there to be kind of a new business penalties. So I guess like like what's the dynamic happening there, where you're able to grow premiums by like 10% and then.
You are getting lower.
I couldn't hear of ours remark.
I think Chris your hidden right on the fact that we've got an attractive business model.
And Dwayne sort of went through those points the.
Specialized focus being good at the target customers being good at our target geographies.
Bringing on the benefits of scale into our products sophistication.
The the sizable expense advantage, we have now and it's increasing our ability to do a better job on loss cost management every one of those items works together to allow us to be a stronger organization and that allows us to generate.
Stronger growth and do that at attractive margins all all of those things play together and once you have the advantages. It allows you to accelerate.
Okay got it and then if I'm just thinking about like your your target market. I mean are there areas, where you're starting to get saturated or is there just that much like Greenfield ahead of you I guess, yeah, I don't really have like a good way of unlike thinking about the the non standard market in and in some of your geography that unlike what your.
Market share is versus what the potential can be.
I think probably were at a point, Chris when we sit and look at it we can ride this horse for a long time, what we are very thoughtfully growing outside of California, where you might have looked and said boy, that's where we might have the most concentration we're leveraging our strengths to grow outside of those geography.
And continuing to be to be successful there.
I think you know.
We're probably a long way from from being tapped out on growth at our size you know you give us.
25, or $30 billion I'll start worrying about it.
Okay Perfect and then just one last numbers question on the preferred PMC auto piece. The underlying combined ratio was up 250, bips year over year or I guess any color on what's driving that.
Yes, this duane yeah, and I think there you're seeing a little bit of pressure on the new business side. You know as you recall you know, we've we've introduced a new platform and new product, we actually rolled in our last product in may of this year. So we're now in everywhere, we're going to be in and of course now that it's in you know we gotta go back.
And we're going to dial it in so we've got a little bit of new business, but all day, that's in there and the gangs working hard in terms of.
Understanding what those drivers are making those corrections.
It really is a perfect example, Chris said the to the two questions in combination.
Where the that preferred business, we're still working on enhancing our capabilities there and we don't have the same strength of competitive advantages that we do in specialty and the new business penalty you'd expect to see you're seeing there and it will work its way and we've got a longer average customer life I'm. So we've got a longer period of time for that to work its way through.
So we can get comfortable with that may be a value added transaction over the long term.
But you're seeing a the real strength to the specialty franchise when you compare the two.
Great. Thanks, all the answer it's got to lock in the fourth quarter.
Thank you.
Our next question will come from Matthew Carletti of JMP Securities. Please go ahead.
Hi, Thanks, good afternoon.
I'm just a quick when a follow up I think on Christmas last question, there, Joe or Dwayne can you kind of pulling preferred together can you give us an idea of kind of me on the old proverbial baseball analogy kind of what inning are we in or kind of how should we think about how much progress has been made.
How much more kind of path or is it had to where you get to a point that that you feel you have those competitive advantages and the business is kind of run rate.
Yes, I'm. Good question I think you know from the from in terms of the efforts in the progress I'd say, we've we've made some huge strides, albeit in terms of getting it to where we wanted I would I'd say, we're probably in the middle innings, you know the fourth fifth inning of the game you know with more work to do I think anytime you launch a new product and Joe mentioned, you I International Apollo.
See basis, you know you've got up you've got I get market feedback and you've got to get results and so we're still true in those up but with what we've done in terms of the build the segmentation and all the effort then went into get it into the marketplace. We now have more insight in terms of what we need to do and that's what you know that's what we're spending our time.
You know when when we put the we dealt with the issues dealing.
Early on Matt The first thing the business needed was a different policy administration system and you've been following the organization long enough to recall that the company had it had written off its first version at a more sophisticated on policy administration system. Fortunately, we were covered most of that from.
From our Arbitration award.
So so that we recovered the time.
We've put in a guidewires a policy administration system that enables us to be much more nimble and much more effective that had to be done before we could start deploying some of these capabilities. So that in we've taken a first shot a new an updated product and are having the new business penalties, we would normally expect running through.
We're having the disruption that occurs when you normally convert programs from one one rating system and one rating program to a new system in a new program. So that's running through right now.
We expect that to take probably another 12 months.
To get through the system.
And we'll continue to improve our capabilities inside of that space, We're gonna get hopefully some tailwind help from the claim side because we use parts of our claim department you know between specialty auto and preferred we clearly have a focus on some parts of this that are our specialty and some that are.
Uniquely preferred but there's some pieces like the physical damage.
Adjustments when you're dealing with the metal on vehicles.
That that very much works back and forth between the two groups some of that scale advantage that we're getting.
And strength in the specialty side, we'll we'll have a halo effect and eventually work its way into preferred and as Wayne said, it just moves a little bit slower with 12 month policies.
Okay, great very helpful. Thanks for the color congrats on the quarter and best of luck go for it.
Thanks, a lot.
This concludes our question and answer session I will let to turn the conference back over to Joe locker for any closing remarks.
Thank you operator, and thanks, everyone for your time today and your interest in Kemper, We look forward to speaking again next quarter. Thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.