Q2 2020 Kemper Corp Earnings Call
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Second quarter 2020 earnings Conference call. My name is coal and I will 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 at that time.
As a reminder, this conference call is being recorded for replay purposes.
I would now like introduce your host for today's call.
Seen Patrick separate Vice President of Investor Relations Mr., Patrick you maybe yet.
Thank you operator, good afternoon, everyone and welcome to Kemper's discussion of our second quarter 2020 results.
This afternoon, it you'll hear from Joe Locker campus, President and Chief Executive Officer, Jim Mckenney, Kemper's Executive Vice President and Chief Financial Officer, and Duane Sanders, Kemper's Executive Vice President and the property and casualty Division Presidents will make a few opening remarks I can bite context around her second quarter results and then open up the calls.
Great question answer session.
During the interactive portion of the call our presenters will be joined by John Michel Eat Kimberly Executive Vice President and Chief Investment Officer, and Eric Sternberg kind of executive Vice President and life and Health Division President.
After the market's close this afternoon, we issued our earnings release and published our second quarter earnings presentation financial supplements and form 10-Q, you can find these documents on the Investor section of our website at Kemper Dot 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 companys outlook and its future results of operations and financial condition.
These statements May also include impacts really just the cobot 19 pinned up.
Our actual future results and financial condition may differ materially from these statements for information on potentially risks associated with relying on forward looking statements. Please refer to our 2019 form 10-K or second quarter 2020 form 10-Q, as well as our second quarter earnings release.
This afternoon discussion also includes non-GAAP financial measures, we believe are meaningful to investors one such measure I would like to highlight again is as adjusted for acquisitions.
It was 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 the combined businesses.
Since our as reported financials 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 usually visible in an effort to provide insight into the underlying performance. The combined businesses. We also displeasure financials as adjusted for acquisitions.
This new removes the impact of purchase accounting and includes historical Infinity information for periods prior to the closing the acquisition more easily provided meaningful year over year comparison in our financial supplement presentation. An earnings release, we have defined and reconciled all the non-GAAP financial measures to GAAP, where required in accordance with actually see.
You can find each of these documents on the Investor section of our website at Kemper Dot com.
All comparative references will be the corresponding 2019 period unless otherwise stated.
Finally, I would like to note that due to the especially the something practices, but kemper's falling in response to cope with 19 crisis or call participants are not in the same location. This may cause the question and answer section of our call to feel just trying to the times, we apologize in advance and ask for understanding some are listeners I will now turn the call ever to Joe.
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Thank you Christine good afternoon, everyone and thank you for joining us today.
We continue to find ourselves in anytime.
And deck is impacting consumer behavior macro economy investment environment, and how we conduct our business operations, we expect that to be the case for the foreseeable future.
The effect of these items can be seen various parts of our financial in aggregate. We continued to deliver strong result.
We remain confident in our business model, our financial position and our ability to continue to serve our customers and deliver value for our shareholders.
Now turning to page four to discuss our results this quarter.
Recorded strong results in the second quarter in spite of the environmental challenges we faced.
Net income was $126 million or dollar 91 per fully diluted share adjusted consolidated net operating earnings were $79 million or $1.20 per fully diluted share.
We generated a rolling four quarter return on tangible equity, excluding unrealized gains of 19%.
We talked a lot over the last few years the value of our diversified model and how it enables us to deliver consistent returns.
The positive investments enhancements, we've made across our businesses have resulted in significantly improved earnings and stable cash flows for both favorable as well is challenged economic environment.
Additionally, the model provides meaningful capital efficiency.
Together with strong execution. These advantages enable us to consistently generate attractive returns for our shareholders. Our results in the current environment I like the benefits of the model.
As we previously disclosed our specialty and preferred auto businesses provided customers approximately $100 million in premium credits during the second quarter.
I thought process follows a similar principal providing attractively priced policies to our customers, while delivering reasonable returns to our shareholders.
Matt this customer expectation allows us to significantly grow the business and to maximize shareholder value over time.
Pandemic is impacted most of the input and the auto pricing equation to some degree and credit allow us to deliver pricing consistent with that principle.
Continue to monitor the impacts of the pandemic inconsistency consistently applied this concept going forward.
Our specialty auto business continued its trend of strong performance in the quarter.
Margins remain solid and we were able to provide attractive pricing to our customers. This resulted in significant policy growth and further strengthened our market position.
Additionally, we continue to invest in our platform and capabilities, which will allow us to better meet the needs of our customers and drive future market share gains.
Our preferred segment also delivered a solid quarter.
Well the auto went home and other line showed continued improvement in underlying combined ratios as a result of ongoing profit improvement actions across segments.
Well, we're pleased with our progress we continue to evaluate a number of actions that will lead to sustainable and profitable growth.
Similar to our other businesses life and health was also impacted by depends on it.
Increased mortality experience was offset by reduced morbidity in our health book and net investment income was down its first quarter market challenges were recognized in the quarter.
Well, we expect some near term volatility in benefit costs related to pandemic remain positive about the long term prospects and the strategic diversification benefits the life and health business brings to our organization.
Our strong balance sheet and ample capital and liquidity provides significant financial flexibility.
Not only allows us to support our businesses through turbulent times, but also enables us to act on the opportunities that may present themselves in the current environment.
In summary, we successfully delivered profitable growth in an uncertain macro environment, we made important investments and enhancements to our capabilities, we strengthened our competitive advantages and we delivered significant value to our shareholders with that I'll turn the call over to Jim to discuss our consolidated operating results in more detail.
Thank you Joe and good afternoon, everyone.
Turning to our results on page five net income for the quarter was 126 million or $1.91 per diluted share.
Represents a 3% increase in net income for the second quarter of 2019 adjusted consolidated net operating income was 79 million.
Our ability to deliver strong topline growth solid margins at attractive returns in an uncertain operating environment is a testament to the resiliency of our business model.
On page six we isolate the key sources of volatility.
This was marked by crusher and alternative investments seasonally elevated cat activity and increase prior year development.
And we'll touch on cat activity and the development later in the discussion.
One additional item of note is this quarter strong equity market performance resulted in the recovery of a significant portion of the losses, we experienced in Q1 within our equity portfolio.
Turning to page seven.
Net investment income.
Routing coli for the quarter was 68 million down from 97 million in the quarter of 2019.
Approximately 66% the decrease was driven by our alternative investments, which put pressure on our annualized portfolio yield.
I'll remind you that many of these investments report on a lot sort of reduction reflects the pressure we saw in financial markets during the first quarter.
Our portfolio composition and strategy remains consistent and focus on high quality fixed income investments as of the second quarter, 93% of our fixed income portfolio consists of investment grade securities.
From a credit perspective, the portfolio continues to perform impairments were roughly 10 basis points broadly speaking the quality and the diversity of the portfolio continues to effectively support our businesses.
Hey, Jay provides a walk of net investment income from Twoq to 19 to Twoq 20.
Aside from the impact of alternatives are not investment income yielded solid returns.
Well rate movements were stark over the quarter our portfolio remained relatively resilient.
This is in large part due to actions we've taken over prior quarters to address the risk of lower for longer interest rate environment, which included extending the duration on a large portion of our fixed income portfolio.
As of the second quarter, our weighted average maturity was 12 years with an effective duration of seven years.
Turning to page nine.
Our capital and liquidity remains strong.
943 million of committed and contingent liquidity, an increase of over 75 million compared with the end of 2019.
We generated over 200 million of cash in the quarter have generated over 560 million over the last 12 months. This is a testament to our diversified model, which is designed to pretty stable cash flows to favorable as most challenging economic cycles.
Broadly speaking our capital management strategy remains unchanged our capital stack continues to provide significant financial flexibility to support our businesses and take advantage of market opportunities our insurance entities remain well capitalized our debt to capital ratios below 16% and we have no near term debt maturities.
On page 10, I'd like to highlight some of the capital metrics, we tracked closely including growth in tangible book value per share and tangible return on equity.
Together these metrics demonstrate the efficiency of our capital deployment decisions and intrinsic value creation.
Over the last year, we have increased shareholder value by approximately 17% as measured by growth in tangible book value in cumulative dividends. This is driven by the team's strong execution capabilities and business model.
Our operating model continues to generate strong returns over the quarter with a rolling four quarter return on tangible equity excluding unrealized gains of 19%.
The fifth consecutive quarter of delivering tangible returns in high teens low twentys area.
In summary, we are pleased with our financial performance over the quarter, our strong balance sheet financial flexibility and diversified operating model position us to deliver continued growth mid on economic uncertainty and serve as a source of strength for all our stakeholders.
I would now like to turn the call over to Duane to discuss the results of our PNC segments.
Thank you Jim and good afternoon, everyone.
Let's begin with the specialty segment on page 11.
The segment continues to perform exceptionally well despite a challenging backdrop that included a reduction in consumer shopping activity and other pandemic items that impacted the pan out.
We generated approximately 68 million of earnings in the quarter, we continue to achieve industry, leading growth as we execute on opportunities to expand in both new and establish geography.
Policies in force increased 7.5% compared to Twoq, you 19, when excluding sale of classic car and net earned premiums grew 10% year over year, excluding the impact of $87 million upbringing credits.
The reported combined ratio was 91% the underlying combined ratio on an as adjusted basis was 89% our performance benefited from changes in driving behavior due to shelter in place orders that led to a decrease in frequency.
This was partially offset by an increase in severity and bad debt as well as pressure on investment income.
Long term outlook for the specialty segment remains attractive we continued to deliver competitive pricing for our customers and generate consistently strong profitable growth.
Investments in our business continued to strengthen our capabilities and low cost operating model. These investments will enable us to enhance our value proposition to our customers and generate consistently attractive returns for our shareholders.
Turning to the preferred segment on page 12.
We continue to make good progress in preferred.
Second quarter underlying combined ratio for the segment was 84%.
Preferred auto reported an underlying combined ratio of 89%.
Core performance continued to improve and the book benefited from similar favorable trend as our specialty auto portfolio.
Our home and other underlying combined ratio also improved as we see continued benefits from our profitability improvement actions.
During the second quarter, we experience easily elevated catastrophes, largely as a result of weather related events in the southeast catastrophe losses for the quarter were in line with Twoq, you Nike and significantly better on a year to date basis.
One additional item I'd like to know is a $9 million of adverse development. We recorded in our auto book. The primary driver of this was an increase in demand notices in U.N.B. I.
At this point is unclear at this represents an increase in line or an acceleration of timing for reserving purposes. We took the view that it's an increase in buying it is important to note that we're not seeing similar activity in other parts of our preferred or specialty books.
In summary, we're pleased with the progress we've made over the last few quarters. The actions, we've taken to enhance underwriting pricing and exposures are paying off and we continue to evaluate additional opportunities to deliver sustainable profitable growth.
Now I'll turn the call back to Joe.
Thanks, Duane turning or life and health results on page 13 segment income was $16 million compared to $13 million in the second quarter 2019.
Please recall that the year ago quarter add roughly $6 million onetime items.
Formats in the quarter was impacted by pandemic related mortality that was elevated but in line with national Engineering.
Is offset by lower morbidity in our health book and a couple of a onetime items. In addition segment earnings were impacted by lower net investment income.
Going forward to the extent that the nation continues to see elevated pandemic related mortality, we would expect to see a parallel impacting our business.
During the quarter, we temporarily suspended new life sales due to stay at home orders I mean since resumed new business production and are continuing to adapt to the pandemic environment.
In summary, we remain positive about the long term outlook for our life and health business. We continue to assess new growth opportunities. We expect the segment to continue to play an important strategic role in providing diversification benefit and enhanced capital efficiency.
Turning to page 14, I'd like to spend a few minutes discussing other current environment is impacting different areas of our business.
The situation with the pandemic remains fluid as widespread state reopening than June were followed by enhanced restrictions across some geography as infection rates began to rise.
The movement in and out of state recovery phases has implications for both the overall health in the economy as well as consumer behavior.
You know, especially in preferred segments. The degree of locked down the states are experiencing as well at the potential to shift between phases, the preopening will impact driving as well as insurance shopping behavior.
And our life and health segment, we expect mortality experienced increases coven related deaths increase but to remain in line with national trends.
We expect increased market volatility and sustained low interest rates, resulting from continued economic uncertainty impact our investment portfolio.
Despite these challenges our business continues to be well position to deliver value to all of our stakeholders, our capital and liquidity are strong.
We have a high quality and diversified investment portfolio that is built to support our businesses.
And our diversified business model provides consistent cash flow and returns.
Before I close I'd like to acknowledge our employees.
It had been challenging times for everyone, but every day I'm reminded of the resiliency dedication and focus of our entire team their commitment to meeting the needs of our customers, while delivering value to our shareholders be proud to be part of this organization.
And now we'll turn the call back to the operator to take your questions.
We will now begin the question and answer session.
Good question. Your press Star then one on your Touchtone phone.
If you're using a speakerphone. Please pick up you had said before personally key.
To withdraw your question. Please press Star then too.
Our first question today will come from Greg Peters with Raymond James. Please go ahead.
Hey, good afternoon, everyone a couple of questions first.
In the specialty business I was wondering if you could give us more color around the policy count.
I was looking at the data you provided and it looks like sequentially policies in force were down a little bit.
So I'm curious if that's just a reflection of what was going on during the second quarter versus the first quarter.
You know and in the context of what you saw that's certainly seems like you're drawing and so I'm just a follow on would be where what markets are you growing and relative to a year ago.
Sure Greg Let me just make sure we're looking at the spot you are to make sure. We appointed the same numbers where are you seeing what do you seem the sequential where are you. So I'm looking so I'm on page 11.
And you're showing policy count of 19 owed to.
For on for and then if you go to the same slide and this is slide 15.
For specialty it says 1914, Mrs for the first quarter got it for like Yeah, Yeah last year, Okay. I understand exactly that's something that this is not last or this is a friendly yet I'm sorry last last quarter, Yes, I I misspoke first quarter of this year.
Yeah, there's up did a modest downtick in that sequentially.
And and you're correct I think that part of a big chunk of what we'd expect to be happening is there was dramatically less shopping behavior.
In the quarter.
So there is some impact when we do that that sequential sequential component we are growing policies.
On a year over year basis.
And just thinking about a break that way I'd also think about it that to Joe's point with shopping behavior.
What you're seeing is a little bit of the different than the mix just over those periods of time because of the disruption between those policies that are more you know six month policies versus one year and so I think the right way to look at that is on the year over year basis, just because some of that normal business that would have continue to flow and that is.
More short term in nature effectively you see lots of that coming in it out and you really see when you look at the one your number in the quarter over quarter comparison, you see the difference in terms of those policyholders that are longer term a inside your book and drive a lot of value.
You should you should remember that it the right way to look at it probably is X classic car.
And that number in the first quarter was 18 79 versus in the current quarter 18, 77. So there were essentially flat the decline you're seeing is largely driven by the classic car piece.
Okay.
Mercury Oh announced their results. This morning, and obviously there are different market than you are but they are in California, and they did announce that they intend to extend their premium refunds for the month of July I.
I know you guys had been up <unk>, given a very generous program in the second quarter, there been any discussion about extending beyond the second quarter or where do you think youre sitting with that at this moment.
Sure I tried to address those those comments early on and off sort of <unk> point back to those comments.
We announced a 15% auto premium credit for.
The first two months for the quarter.
We ultimately added some additional credits in June.
The bulk of those additional credits were related to California. When we took those additional credits in the month in June we looked.
Bye Bye line so for auto we looked by product, we look individual states on him to look at the individual behavior.
We're seeing underneath that you were starting to see stay at home orders lifted and activity return in different paces.
We're looking at all of the pricing variables that go into the auto equation. Some of that's frequency there'd been severity impacts there were.
Bad debt impacts when we were extending grace period.
Net investment income has obviously been impacted so we were sort of looking at the totality of those and taking a view that we wanted to.
Rebalance the equation. If you will you know we had a point of view from a pricing perspective of where we thought was a inappropriate relationship with a customer generated a reasonable return for shareholders and our goal is to grow the business as much as possible because we thought that provided the best answer for customers and it provided the greater shareholder value creation.
Abide by growing the organization over the long term, we're going to take that same point of view.
We look at the the rest of the pandemic. So if we see all of those variables coming together with the equation data balance, we'll think about additional additional premium credits as appropriate and we'll do it on that surgical basis and individual product and state level.
Maybe the best way for you to think about it Greg if I run your shoes.
It might be to say, we're not expecting to see a high degree of favorable benefits just in frequency work their way into the bottom line I'm, we're looking to keep that equation largely balanced with the upfront intent.
Got it and in that <unk>.
When you talk about like.
Talk about it like that you know I'm looking at the underlying combined ratio for the specialty.
Which you know obviously came in below 90, which is a great result for you, but if I look at the it.
Feels like the targets more in the low ninetys versus below 97 inaccurate read or.
Am I in my over thinking this.
Well it depends on what you're expecting the investment income environment.
To be and.
You know sort of everything that the that works through the pricing equation, we stop and we think about frequency severity <unk> bad debt components service expenses that run through through all of these items, whether or not there's a difference in how frequency work pretty when they were quoting.
In servicing policies, what the investment income on the picture is we're in uncertain environment. So the error bars. If you will around every one of those is a little bit wider.
In trying to Peg you know, where we're truth ultimately will end up on all of those.
So we're looking at all of those equations.
It becomes a little harder to project the exact outcome of all of them because they're all moving in slightly different directions them at a little more volatility than we normally have.
Hopefully that helps so you know we're not fundamentally changing our underwriting our ultimate or are we target or or a T.C. target because it does and we are recognizing that they did it in a different investment income environment that might somewhat change the underwriting target.
But those things should actually be held together when we think about about the appropriate price for a customer in the appropriate return for shareholders.
That makes total sense of just the final question and I know you discussed it in your opening remarks, but can you just revisit the prior year development.
And give us some more color around what you think is going on there and you know just some additional datas. So we can help process us.
Maybe ill at Duane They started talk about it and then a couple of US may provide a little color.
As we go.
Got it Yep no. Thanks, Joe So are you speaking to on the specialty side or preferred side I want to make sure I'm addressing the question.
Well, specifically you talked about the U.M.B. notices so that's what I was specifically focused on.
Yeah, No got it yeah. So what we're seeing there right is a I'd call. It just a pronounced activity on the on the U.M.B. I piece.
It's you know I'm, we're going to you know, we're taking I think we're taking the right approach on it we're going to you know we're in a monitored and track. It. So you know demand notices have historically would come in we had patterns around those you know we could almost you know from a timing perspective, when those would show up and it seemed do.
You know as of late has has moved forward owners are has again I would call. It pronounced is just more more coming in that we've seen in the past. So we're we're trying to see if this is something that's different a change in pattern or what it might be now you know normally what happens on the U.N.B. I it seems to be in around with it turn.
These were you get the simple or stop upfront, which might be some of that you know the the Pip actions and then you'll get your B. I then it works its way into the U.M.B. I. So I don't know kinda, if there's a change and kind of the norm for even though on the attorney side, where there's some acceleration on those on those on those cases so.
Again, we're we're watching it it seems to be isolated right now right. There on the preferred side and we're going to we're going to continue to monitor and see where see where it comes out.
Was there was it the concentrated in a specific state or region or just you know what did it. It is not we've done some deep dives on that to better understand it. It at this point <unk> I had to say it'd be more environmental in nature in terms of Ah from a geographic perspective, it's not.
I'm here I can't I can't say that it was you know, California, New York North Carolina, It seems to be or just generally across the board.
Hey, Greg I think 20, so in a really nice job kind of highlighting literally the uncertainty is what I would take a from a take away perspective.
Is you know we saw a little bit of a change in terms of a pattern in terms of just the speed. It when things come in you could read that as his notes indicated as more or you could read it as a similar event, but because you've got a few less you know things going on in the world accidents other thing.
Thanks, a that you know attorneys are potentially are getting to some of these things a little bit earlier in the cycle than they might normally do no. This is something that we've only seen really recently over the last two quarters. We took the approach to start with Hey, we think it's going to be more city could have a highly confident a number from a balance.
She we could get this potential item behind us it could work out take quite frankly at the end of the day that we just see it as an acceleration or there is really due to the environment.
But I think that take away is realistically, we got to strong balance sheet. We don't anticipate this being something that you know is ongoing.
And you know, it's it's something that really short term here in nature in terms of where we've seen it over the last couple of quarters.
Great. Thank you for the answers I guess I should add dog congratulations to Christine and you guys got to sit down and talk to her bought her definition to maternity leave.
We did have a couple of discussions around optionality and she'd reminded us that she was was more than an adult I'm, a but we do congratulate her on the newest addition to her family.
Thank you everyone.
And once again, if he would like to ask a question. Please press Star then one.
Our next question will come from Paul Newsome Piper Sandler. Please go ahead.
Thank you good afternoon, everyone.
Could you give us a few more words on just the general competitive environment in the auto business in particular.
There are concerns within I guess, the standard auto business that.
<unk> farm and maybe some others seems mothers or more in rates under the assumption that some of this frequency trend might be somewhat per minute. My my sense is that's not happening one standard but could be wrong.
Yeah, just some thoughts as to what you see out there.
Yeah, you want me to <unk>.
Sorry.
By doing given shop, and now I'll jump into it.
Sure certainly so I would have to say I think you're thinking about it right. It is nuanced its nuances in specialty versus prefer and you see the gamut in terms of activity for the most part in most states you know regulators have really clamped down on any rate increases, but there is a smattering.
Rate decreases probably ranging from the you know nominal minus one 2% all way up to minus 4% depending on the market.
There still seems to be.
An uptick in rate a in the Florida market in particular.
Driven by Tim and the B. I side.
So not as much on the downside there. So you know all in all you know we find ourselves in a good spot we monitor the marketplace. We're watching for all that rate activity to you know as it manifest its way through the you know through the through the process, but I think it depends on where you are who you're competing against and then.
You know where each you know where each competitor finds himself. So it's it's bastien varied I would say at this point.
I think that thing I'd add to it Paul but I agree with Wayne is you know the bulk of our businesses in the specialty auto space.
And we are not seen.
A meaningful difference in the competitive environment.
Inside of that space I know, what you're talking about relative to a couple of the big guys in the preferred auto and home.
How are they got preferred auto space potentially behaving differently, we're not seen that signal that kind of a change in activity inside of the specialty auto space.
I'm also curious about any early reads on changing demand in life insurance side of the house.
We would expect there's some cross currents there with.
Sure the mood, obviously knew the showing why the product is valuable but then that's it.
Thank you all can I ask you can actually to stop for one second can can you just start the part of the question I heard I I lost a couple of words and I don't want it didn't stop you whenever you do the whole thing over you I know you kind of life insurance.
[laughter] so on the life insurance side I was wondering if there had been in the early reads on changes in demand for your product I would imagine there's some cross currents there with the obviously the product having some.
Obviously increased value, but also it's a pretty it's a it's a mortgage segment it was pretty hard hit from an economic perspective.
Yeah, what we're seeing particularly in our market segment I know how it works across all of life insurance, but in our segment, where we're seeing anything if anything a positive view.
We we suspended life sales for part of the quarter, just because we were fairly high touch the kind of environment and we modified some of our processes around that they wanted to be respectful of shelter in place orders, even if we were in a central business, we didn't see new sales as at the top of did the urgent list. So we slowed.
Now, we actually saw improvements in our lapse rates, meaning that people were making sure they pay their bills because they they valued the product.
So so that was a positive sign and in terms of once we restarted the sales were seen very strong and healthy LT new business sales any.
Any there's a little bit of pressure there, but I wouldn't describe it it appears to be more operational in nature of just the ability to get out in about and talk with people.
And it is any reticence or or lack of interest from a demand perspective.
Sometimes you see a macroeconomic.
Pressure or or some sort of property related cat that may have some pressure on demand I think the fact that this is is a pandemic related issue I think has people people thinking about issues in valuing the products.
You know the differently, so I think it probably a plus.
Sure I appreciate the question and answers thank you very much.
[music].
And again, if you ever question. Please press Star then one or the next question will come from.
With.
Go ahead.
Hi, I wish I got thanks for taking my question.
In the light to be the fact that.
Most of insurance companies are issuing refunds or on the auto side can you just how should we think about your expenses, especially around the commissions. The you paying the agency channel to create a more policies because that typically go down with the.
More revenue or.
Should we expect back number two space that stay static.
Yeah I'll go back to the comments I made at the top of the presentation and really back with Greg Peters.
The way we're looking at the.
Any any premium return premiums we have the customers is how it balances out in total so we're not.
Looking at this on a unit area basis, we're looking at all of the items. It combined so you know what make up a number pretend before we were we were shooting to run you tell me what combined ratio you want to tech call. It a call. It a 95, if we were trying to hit a 95 combined ratio and we expected a certain investment income return, which.
Produced a certain profit margin, we're now looking at it and saying Okay investment in comes down a little bit. So so that requires that 95 to be a little bit better.
We're looking at what happened to frequency, we're looking at what happened to severity. We're looking at what might be running through is bad debt. We're looking at how we're handling commissions were looking at everything in that equation and then we're saying what would the appropriate premium credit b to return to doing a largely neutral position recognizing that there.
Sort of error bars or margins of error around each one of those assumptions.
So so the commissions the operating expenses overhead everything's taken into account as we think about trying to rebalance that pricing equation.
Which as a as an investor I would suggest to you makes it a little bit harder for you to do an exact line item model, but it makes it a little easier because we're projecting for you what the end outcome ought to be so if you're coming to the conclusion that the margin is radically different as a result, you're modeling it wrong because were.
We're trying to bring it back we could that neutrality.
The one thing I would add to what Joe said, I think adds a little bit of clarity to this as well is remember this isn't a kind of one period.
Yeah, or one point in time type of analysis. When you think about the investment rate environment. When you think about some of the.
The reserves on what's going to happen that that is a multi quarter multiyear view that we have to have in terms of doing the right things book by our customers and our shareholders.
That's that's an excellent point, Jim and I, probably really forgot the described that before think about this when we're doing this we're not trying to we don't price our policies per month, we priced them over 80, a policy term a six month or a 12 month time period. So when we're making these adjustments were saying what would the entire policy period generate.
And and that investment income might be be earned over that entire period, you get a one month. Good guy you still have to deal with the investment income over the entire time period that might provide a slightly when you're looking at an individual quarter, hey, particularly good one quarter.
Spot and then a little bit of pressure on another where pricing over the entire policy period, and we're thinking about this.
Got it and just a follow up if I may when you say you provided the refund for let's say month of April Oh, and me and maybe even in the month of June is that a pro rated refund or how should I, let's say a cop policy cost $600.
For six months, if the refund gonna be only for those three months or is that going to extend more than that how should I calculate the refund.
The way we handle that.
Was customers that were active at the end of April.
Got a 15% credit.
For their April premium.
In there may bill.
Then customers who were active at the end of May.
Got a 15% credit on their may premium deliberate in their June bill.
We did that for all of our auto customers.
Then we came back and then a couple of states on a couple of products. It appeared to us, but the data going through the same process I described warranted and additional credit it was not 15%. It was a smaller number in those circumstances and we applied that for kind of customers who had been cost.
<unk> as of the end of June we applied as a credit to their July bill.
Got it onto so thanks a lot.
No problem happy to help I know, it's a little bit confusing and all of these and every company seems to do it a little bit differently.
Which is why we're trying to describe for you for you all the principal around which we're doing it and how we're approaching it because then that helps you understand what the answer is at the end and why.
And that concludes our question and answer session I'd like to turn the conference back over to Mr. Walker for any closing remarks.
Thank you operator I appreciate it. Thank you all for being with US and for your interest. We're pleased with our results this quarter and look forward to talking to again next quarter. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.