Q1 2021 Kemper Corp Earnings Call
Okay.
Good afternoon, ladies and gentlemen, and welcome to Kemper's first quarter 2021 earnings Conference call.
My name is Jamie and I will be your coordinator today.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
We will follow at that time.
As a reminder, today's conference call is being recorded for replay purposes.
At this time I'd like to introduce your host for today's conference call.
Christine Patrick Kemper's, Vice President of Investor Relations.
MS. Patrick you may begin.
Thank you operator, good afternoon, everyone and welcome to Kemper's discussion of our first quarter 2021 resolve.
This afternoon, you'll hear from Joe Lacher, Kemper's, President and Chief Executive Officer John.
Jim Mckinney, Kemper's Executive Vice President and Chief Financial Officer, and Duane Sanders, Kemper's Executive Vice President and the property <unk> Casualty Division President will make a few opening remarks to provide context around our first quarter results and then open the call for a question and answer session. During the interactive portion of the call our presenters will be joined by John.
MS Shelly Kemper's Executive Vice President and Chief Investment Officer, and Erich Sternberg, Kemper's Executive Vice President and life and Health Division President.
After the market close this afternoon, we issued our earnings release and published our first quarter earnings presentation financial supplement and form 10-Q, you can find these documents on the investors section of our web site at Kemper Dot com.
Our discussion today may contain forward looking statements within the meaning of the safe Harbor provision of the private Securities Litigation Reform Act of 1095.
These statements include but are not limited to the company's outlook and its future results of operations and financial condition.
These statements May also include impacts related to the COVID-19 pandemic, our actual future results and financial condition may differ materially from these statements.
For information on potential risks associated with relying on forward looking statements. Please refer to our 2000 Twenty's form 10-K, as well as our first quarter 2021 earnings release.
This afternoon's discussion will also include non-GAAP financial measures, we believe are meaningful to investors in our financial supplement presentation and earnings release, we have defined and reconciled all the non-GAAP financial measures to GAAP, where required in accordance with SEC rules.
You can find each of these documents on the investors section of our website at Kemper Dotcom.
All comparative references will be to the corresponding 2020 period unless otherwise stated.
I would like to note that due to the social distancing practices Kemper is falling in response to the COVID-19 crisis, our call participants are not in the same location.
Cause the question and answer section of our call cause Hill disjointed at times, we apologize in advance and ask for understanding from our listeners I will now turn the call over to Joe.
Thank you Christine.
Good afternoon, everyone and thank you for joining us on today's call.
Since the end of 2020.
Turning to see economic momentum build in many parts of the country vaccines are more readily available restrictions are lifted and states are reopening as we move towards the recovery phase of the pandemic.
There is no question that the past year has been difficult, but I'm looking forward to the opportunity for more in person interactions with my Kemper colleagues investors and other stakeholders in the near future.
Despite everyone's desire to get back to normal as quickly as possible reopening will present, a dynamic and challenging operating environment. It will take longer to stabilize that any of us would hope.
Just like the start of the pandemic or we saw mixed for both positive and negative financial impacts as we returned to normal we anticipate a similar abnormal mix.
Before turning the call over to Jim to walk through our financials in detail.
Wanted to offer some brief comments on our performance for the quarter.
Turning to page four.
Net income was $123 million or $1 85 for diluted share.
Adjusted consolidated net operating earnings for 87 million for $1 31 for diluted share.
Turning to the key metrics that we use to evaluate our performance over.
Over the past 12 months tangible book value per share excluding unrealized gains increased 17% return on tangible equity excluding unrealized gains was 18% in <unk>.
<unk>, we generated $526 million of cash from operations.
These metrics highlight how our actions are driving long term intrinsic value creation.
Turning to segment results.
This quarter, we witnessed the pace and timing of reopening vary significantly by geography our.
Our concentration of business in California, which was one of the last states to reopen impacted both our top and bottom lines.
Specialty auto reported operating income of $80 million, a 33% increase over the prior year quarter.
Our topline grew 7% shopping behavior in January and February was slow, especially in California with demand recovering later in March we also experienced an uptick in both frequency and severity as drivers have gotten back on the road.
Duane will provide more detail in his commentary.
Despite these near term headwinds the business remains well positioned for attractive long term growth and returns.
Our preferred segment continues to make incremental progress on repositioning efforts quarterly.
Quarterly results were impacted by elevated catastrophe losses, primarily from winter weather related events. Despite.
Despite this particularly when recognizing our reinsurance program are anticipated annual range of catastrophe results is unchanged.
Turning to our life and health segment.
Earnings continued to be impacted by COVID-19.
Our mortality experience remains in line with national trends.
Downtick is also significantly impacted purchasing behavior.
We're experiencing stronger policy retention and increased demand for our products.
Our life and health businesses are positioned to deliver strong cash flows and consistent earnings.
Year to date, we took actions that demonstrated our thoughtful approach to capital deployment.
Closed on our acquisition of American access on April 1st we repurchased roughly 85 million worth of Kemper shares we continue to focus on enhancing our positive impact on the environment and sustainability as Jim will detail, we committed to a solar energy investment, which will provide a renewable energy solution for homeowners, while providing attractive returns.
In summary, while we say some short term headwinds this quarter, we delivered solid results as we move through the pandemic recovery, we expect decreases in mortality as well as increased frequency and severity in auto.
Our business model is positioned to navigate this environment in a way that's good for both our customers and investors.
I'd now like to turn the call over to Jim to discuss our first quarter operating results in more detail.
Thank you Joe.
Turning to page five you can see the results of our strategy execution and the performance. It has yielded for the quarter. We reported net income of $123 million and adjusted consolidated net operating income of 87 million for $1 31 per share.
On page six we highlight that our businesses continue to produce high quality operating income help illustrate this we isolate key sources of volatility that impact quarterly results.
Please note that first quarter 2020 results include over a dollar per share benefit from the final payment of our favorable CSC settlement.
We have also broken out the impact this quarter from our solar investment, which I will discuss shortly.
On page seven.
We display some of the key capital metrics, we use to track our performance, including growth in tangible book value per share and tangible return on equity. We continue to outperform our stated long term return targets, excluding unrealized gains over the past 12 months for return on tangible equity was 18% and our growth intangible book value.
Moving unrealized gains and losses per share was <unk>, 17%. These metrics demonstrate the efficiency of our capital deployment decisions and intrinsic value creation.
Continuing on page eight our.
Our capital and liquidity positions remain solid surrounded by a healthy balance sheet and well funded insurance entities.
Over the past 12 months, our business model generated $526 million of operating cash flows we ended the quarter with a debt to capital ratio of 26%. This is well within our stated target range of 17% to 22%.
On page nine we.
We provide details on nearly $500 million of capital actions taken year to date through April 27, we've opportunistically repurchased approximately one 6% of outstanding shares totaling roughly $85 million. Additionally, we repaid the $50 million term loan.
Further in February our board of directors voted to increase our annual dividend to $1 24 per share. This is our third consecutive annual increase.
Finally, we closed on the $372 million acquisition of American access in total these actions demonstrate our strong capital stewardship.
Turning to page 10.
Net investment income for the quarter was $103 million, reflecting the continued recovery of alternative investments.
Low market yields and rich valuations in certain market sectors.
A challenge for the industry, our portfolio construction, which focuses on matching liabilities and total return helps alleviate some of these challenges. This is evidenced through the quarter's pretax equivalent yield of four 5%.
On page 11, we highlight an investment we made with Sunrun.
Our investment dollars are being used to finance the installation of solar panels on a portfolio of residential houses. This initiative has a meaningful benefit to homeowners as well as to the environment. The structure of the investment allows us to fund the deal as well as receive the benefit of tax credits.
From an accounting perspective returns will primarily be recognized through the income statement as tax credits and deductions with the majority of benefits recognized through 2022.
The largest expected impact took place this quarter, which increased net income by $13 million for <unk> 20 per share. This is a great example of how we can use our capital benefit both the environment and our stakeholders.
Closing the company's financial performance in the quarter was sound and we are optimistic about the future.
I'd like to now turn the call over to Duane to discuss the results of our P&C segments.
Thank you Jim and good afternoon, everyone I would like to begin with the specialty auto segment on page 12. The segment continues to generate strong earnings with operating income of $80 million in the quarter.
Topline remain pressured by states that were slow to reopen particularly California. This resulted in reduced new business volume, which slowed earned premium growth to 7% and policies in force growth to 2%.
S, California, reopen we experienced improved customer demand and growth in late March.
Turning to expenses, we continue to be impacted by the mix shift I detailed last quarter. As a reminder, decreased shopping behavior affects our mix of new and renewal business. In addition, as we grow in different geographies. There is a shift in our mix of state and product.
Last we continue to make investments in our people and technology further strengthening our franchise.
As Joe and Jim mentioned, we closed on the acquisition of American access April 1st It has been a pleasure to welcome the newest members of the Kemper family. Our combined team is focused on integration and the ability to leverage a AC capabilities to enhance our specialty business.
Turning to the preferred segment on page 13, we continue to take actions to improve the profitability of the business through underwriting pricing and exposure management.
This is reflected in the underwriting combined ratio and Pip numbers for both our auto and home business the.
The segment was impacted by $24 million in catastrophe losses, largely from winter weather.
While first quarter catastrophe losses were elevated from historical perspective, it does not change the range of our expected full year catastrophe impact.
This is due in part to our aggregate reinsurance treaty, which helps limit volatility on an annual basis.
Overall, the preferred segment, we expect ongoing profit improvement actions to continue to bring us closer to our desired results.
I've made comments about the impacts of reopening with a return to near normal as we look forward, it's important to think about potential trends in frequency and severity.
We are already seeing frequency increases as miles driven is nearing the pre pandemic level severity is also experiencing pressure as repair costs have gone up with this backdrop we.
We are conscious of balancing short term growth and long term profitability. We will continue to believe we are well positioned for sustainable topline growth and solid margins.
Now I'll turn the call back to Joe.
Thank you Duane.
Turning to our life and health segment on page 14.
Segment income was $7 million, which remains suppressed by COVID-19 related mortality.
However, we are experiencing positive momentum as the P&C catastrophe like impact begins to moderate we're seeing associated mortality reductions.
The pandemic has led to increasing product demand as well as stronger policy retention.
These trends were seen during the quarter for new sales comparable to pre COVID-19 levels and reduced lapse rates.
This is evidenced by the growth in face value of our book is.
His policy stay longer it's good news it creates intrinsic value for our life and health franchise. However, in the near term benefit costs will remain somewhat elevated as mortality and retention trends begin to normalize.
Overall, our outlook for the life and health business remains positive.
The segment is situated for long term cash flow and intrinsic value creation.
In conclusion, let me return to where I began.
We expect the next phase of the pandemic to have a mix of impacts across our businesses.
We expect to see a decrease in mortality more auto insurance purchases increases in auto frequency and loss cost inflation, and a robust economy and associated investment impacts.
We believe we are well positioned for this environment and will continue to provide appropriate coverage for our customers as well as attractive results and value creation for all our stakeholders.
I want to thank our team for their collective effort and dedication Kemper wouldn't be where they are today without their contribution.
With that I'll now turn the call over to the operator for questions.
Okay.
Ladies and gentlemen at this time, we'll begin the question and answer session.
To ask a question you May press Star and then one using a touch tone telephone.
So it's all your question you May press Star two.
If you are using a speaker phone we do ask you. Please pickup your handset before pressing the numbers to ensure the best sound quality.
Once again in order to join the question queue at a star and then one.
We will pause momentarily to assemble the roster.
Our first question. This afternoon comes from Matt <unk> from JMP Securities. Please go ahead with your question.
Hey, Thanks, good afternoon.
Just a couple questions, maybe if I could start with American access.
Can you help us understand I mean, you made comments about California being.
Clothes, you're kind of locked down for a lot of the quarter and opening up later in the quarter. If I recall American accessing kind of biggest exposure in Texas, which has been kind of opposite ends of the spectrum is California with regard to Lockdowns can you give us a little color on what they had been seeing in terms of shopping activity and what we should expect when that comes into the fold with Kemper in Q2.
Okay.
Yeah, well, we'll do well do a couple of comments Duane Duane O'brien, Southern and second Matt just I just went over the top we you know we closed on them on April 1st and none of their numbers are in the quarter.
So we can give you a little bit of a view, where you know where we have some sense of that okay.
Yeah, Hey, Matt. This is Duane it's it's not too dissimilar from what we're seeing in our own book today.
Continue to get deeper into that space to the more we're together, but I would say it's a we're seeing you know because of the nature of the business that we do right is very similar we're seeing similar trends across most of those components.
Okay and that would that would extend into kind of your comments about frequency and severity as well just by geography, you arent seeing much terribly different in Texas versus your bigger concentration, but California and Florida.
That is correct.
Okay, Great and then just a guess.
Modeling question of the of the 'twenty, just what was the contribution from the cats in the quarter towards the aggregate deductible and how about the other way of asking is how much is left on the deductible before youre.
Recovering from it.
Okay.
Yeah No I appreciate the question. Its about 15, you know plus or minus a couple million bucks here or there, Matt and I say that because.
Obviously, we'll have more precision here, you've you've got our best estimate in terms of this stage, but then the next 30 60 90 days as we see more of the the page and some of the other elements that that will.
More fully come in.
Okay, great. Thank you very much for the answers I appreciate it.
Matt I'm going to I'm going to follow up a little bit even though you didn't ask for when one of your questions seem to be poking at frequency and severity and what we're seeing as well as.
You know growth stats and I think you were poking at it trying to understand.
Understand how things are unpacking underneath them, we definitely saw a california reopen slower and given the size of that in our book. It was a significant impact on January and February and into the early part of March we had seen.
In April growth move back to more what we would've seen as normal you know if we thought.
About it.
If you look at the last couple of years, we've probably been averaging that five to eight five.
Five to eight range.
From a growth perspective.
And we're seeing numbers in the lower end of that range. So that's a reasonable way to think about it we think the quarter is a bit of an anomaly and wouldn't want you walking away run rate in the quarter, because I think that would be a bad picture.
Similarly on the frequency and severity. This is a little bit what I talked about when I made a comment about abnormal.
You know as we returned to normal.
In terms of trends, we saw in the pandemic that frequency sort of drop through the floor relatively quickly when people shut down.
And.
As people are restarting, we're expecting that frequency to come back up where we're seeing some of that and.
And some modest frequency or a modest severity increases that are running across the book.
We do expect and now this is a forward view and it's an industry comment.
We fully expect that the market is going to going to eat up people are going to get back to work and we're likely to see some loss cost inflation on the severity side, it's not because the accidents or more severe but when you think about the chip shortages that we're hearing people talk about for new cars.
Those are going to have impact on repairing vehicles, but when you think about what's going to happen.
With employment trends.
We fully expect that we're going to see a relatively low unemployment, we're gonna see costs.
Cost going up.
For for body shops for health care for other items that are going to have a loss cost severity pressure in the back half for the year with all the stimulus that's been put into the economy and with all the supply chain challenges that are going to occur.
We anticipate that that's going to be an industry wide.
Frequency and severity challenge in the back the backside of the year. So that's definitely factoring into our thought process and I assume that's some of what you were trying to get in your commentary, we don't see that radically different by geography, once they're open and we do think it will be pervasive.
Across the industry and something we're all going to deal with.
Okay.
Ladies and gentlemen, once again, if you would like to ask a question. Please press star and then one switch all yourself from the queue you May press star two.
And once again that is star and then one to ask a question.
Our next question comes from Gary Ransom from Dowling and partners. Please go ahead with your question.
Yes.
Good afternoon, I was looking at this a solar investment just trying to understand the pieces I realize you said a lot of it will come through the tax line.
But I was wondering if you could kind of help us understand how that might affect the the actual tax rate that we see going forward or how much how many dollars rose eligible to save.
The future quarters.
Thank you so I think you're asking for projections, so generally speaking.
As these things you know play through I mean, this quarter, we had roughly $28 6 million I believe again give me a little rounding maybe 100000 here or there but <unk>.
Benefit that came through that's followed by you know and have an.
An offset of the assets by about $15 million, which gave you about a $13 million benefit.
Those elements are generally recognized for the crop are the tax components are generally recognized.
That was incurred from.
That perspective, there will be some benefit as you go forward, but more of that will come with and as we continue to fund the investment.
Good day about $65 million of the 100 million has gone out there's another 35, when you think about the ratio of the 28 to the 65 that would give you a reasonable.
You know estimation of what might come in the future for some other credits or other elements that are coming through in terms of the timing of that.
It would be really hard for me to tell you whether it'll be you know.
More of that will come Q2, Q3, Q for a lot of it has to do kind of a sales demand and relationships that.
Sunrun has as well John.
So yeah that will literally occur as you know as they found.
Okay.
Just going back.
Really attractive item, though I mean, if you think about just net dollars both in terms of what does it mean.
Now from an environmental perspective, and then also you know doing something that's thoughtful for our shareholders in a way of.
Increasing capital effectively through.
You know.
Utilization of tax credits.
Is it really thoughtful thing for us to do.
The item that we're actually seeing in the income statement the negative piece not the tax piece, but is that.
How does that relate to the actual investment that you made in the quarter.
So you're getting basically and I'm going to overly simplify here for a moment, let's say you're getting a 2% cash return and then we're looking at say a 9% wherever 10 eight I'm not trying to give you too much of a number but just if you pick the number right.
At the end of the day, that's our after tax kind of IRR that would come in so as we get effectively.
Income that would be both above that 2% and our tax credits. You then are impairing that asset that you sent out the door to reduce its value right to bring you back to say again that 9% because that day to that 10% of what your target IRR is and what it would take to run for the amount of the write off.
The amount of the Wright Eichler exactly.
But you should again similar presentation. If you look at you know progresses financials and some of the others that are out there I think you'll see similar yeah. My treatment right, yeah, Yeah, and I wouldn't suggest it's going to repeat every quarter either there. There's the largest component of this has been recognized this quarter.
The way to think about this is really that net outcome. If you look at page 11 of our earnings presentation.
<unk>, we try to put the pieces together for you. So you see the $15 4 million production to total revenues in that line item is obviously broken out we did that specifically to provide the transparency and to enable kind of that predictory component in that confirmatory component and then you see the $28 6 million a benefit for them.
Credits coming through for a net.
The increase of income of $13 2 million.
Okay. That's that's helpful. How you think that that are set for me in the right direction.
I, just I'm going back to the.
Two the growth.
I just finished reading a a J D power survey that I was talking about how there was a huge amount of additional shopping this is going back to 2020.
And.
I'm.
Thinking about what you are talking about how the shopping was lower for your.
Part of the business or for non standard specialty.
Does that makes sense to use there'd be a lot of shopping going on and then for a lot of other major players, but you might see less.
Yeah, Gary It does make sense to us conceptually and Ah and I'll tell you why we tend to see in a normal environment with standard what was almost anybody.
The absolute dollar amount or paying for insurance and the price changes they see or life events trigger shopping behavior. So your typical standard and preferred.
Individual insured.
They there's there's a normal amount of people moving around and buying cars, which sort of set the baseline if you're in a relatively stable pricing environment.
Then you don't you see a certain normal level of shopping behavior, unless there's some sort of shock to the system either a big rate increase that runs through or something something else. That's sort of wakes up the the group to say hey, I want to think about this you see a modest amount of shopping behavior. The pandemic was one of the things that people said, hey, I'm not driving.
Is this just makes sense and you're starting to hear about it in the news and people talk about it so that group would have seen there and an increase in behavior.
In our specialty auto environment.
What you tend to see is a heightened sense of shopping when people are seeing rates going up and when they're seeing there.
They're moving through their own economic activity in this environment, they were seeing less rate increases and less disruptive changes. So they could've simultaneously gone down because they were getting premiums get backs in teen non rate increases at the same time, they preferred group might've been seen more activity up so.
Yeah, It would probably be that they the nonstandard group may have still been elevated relative to the preferred but it was lower than normal.
And the preferred group may have still been below but it was higher than normal it's not it doesn't necessarily conflict those two components.
And what we were talking about in the quarter.
When when people.
Our are generally staying at home and the activities less.
They're they're buying fewer cars.
They're you know, they're they're executing fewer transactions that triggers that shopping behavior in the specialty auto environment and that's exactly.
Actually what we saw in California, and the rest of the country.
In in March and April last year, and it's definitely what we saw in California in the early part of this year.
You know, it's it's a good thing to remember that when youre, comparing particularly when you're comparing shopping pieces.
You know, our California businesses.
60 ish percent of our total auto book, you've got some other big players like a progressive it's mid single digit I'm you know so it is we're going to look different meaningfully than other folks as a result, and the specialty auto piece will look different than that J D power.
Right.
Okay.
That's that's very helpful. Thank you very much.
And our next question comes as a follow up question from Matt <unk> from JMP Securities. Please go ahead with your follow up.
Hey, Thanks, Joe just to circle back on the color you gave there and thanks for that.
Would it be right to then think about whether it's for industry or for Kemper as part of it and the non standard world that as it's kind of those dynamics take place. It's frequency is back in a severity might build a little you guys or the loss ratio in the quarter ex cats is kind of you guys manage the business to a pretty tight range and it is.
Kind of back to the lower end of that couple of point range that it bounced around in the presumable that think that a reasonable to think that you might grind your way up in that range and that occurs and then and then assuming the industry extra sponsored we didn't take pricing action to combat it.
You work your way back down to a equilibrium.
In general I agree with your statement, but I'm going to disagree a little bit with the the starting point.
Okay.
We look to get an appropriate return.
There is a reasonable range around that and then grow the business as much as we as we can the pandemic.
Resulted in frequency dropping and resulted in a series of change that saw the industry broadly see a combined ratio improvement we did as well we have consistently been saying you should not assume that the combined ratio you saw say in the second or the third or the fourth quarter of last year be run rating that because.
That is not what we are targeting as a long term combined ratio.
That that has some some overheated.
Favorable profitability, which we expected was going to reverse out when the frequency came up that's why we didn't necessarily we did some premiums get there actually we didn't move rate down because we expected when that frequency and severity pop back up.
That was we had closer to the right rates for a normal environment.
That makes sense I was looking at the quarters and like 18 and 19 when do.
If you go back to where it was then.
Yeah, Yeah. That's my books, that's ammonia, we're well below that of course in 'twenty, Yeah. That's all.
The.
If you did math and you think about Roe's, Matt you're going to wind up in a in a mid to upper Ninety's combined ratio.
So it depends on which point you pick and you can pick up you can see a bunch of different things.
In there, but that you know of a progressive would've said for years, they're targeted at a 96, we don't give you a combined but we give you a low double digit Roe.
Put your premium to surplus ratio on there you're going to come out with a you know a 90 90 697.
Number that's somewhere in that in that range that.
Biogen appropriate return an appropriate ROE and we're gonna be looking to grow from that so you should expect some compression.
From where we are as that frequency and severity upticks. Our expectation is every auto carrier is going to see the same.
Concept, that's going through the severity, we might get a little bit of a difference on frequency depending on state mixes, but the frequency is going to come up.
And if there's a supply chain issue. If it you know getting steel getting parts getting getting labor to fill our body shops, getting you know who knows where they make the paint if it's getting shipped from ovaries I mean, we see all these things going through the supply chain.
I don't see any way by the fourth quarter of this year, we're not going to see a lot of stress on that system.
And it's gonna pushed some sort of of inflation in there now if I'm wrong, great. We're all good if I'm right. Then we're all in trouble and there's there's a pressure there and the question becomes whose models in a better spot to respond around it.
We we had been anticipating that the unwind from the pandemic would have some of that in it.
And we're we're not.
Were not maybe pulling the most aggressive growth levers that we might have been able to that might've sort of permanently locked in lower rates, we were anticipating.
Dissipating this was coming.
And you've seen a year, where there's been not a lot of rate increases from from different players some with decreases.
I think that pressure will work its way through in the back half of the year.
That makes sense for one one quick numbers question, just as you were talking a little bit of top line before.
I'm recalling at about eight.
I know, it's $87 million of premium credit flat Q2, so obviously up something to adjust for as we think about the skew to that for for non standard auto yeah. If you're if you're just trying to do a premium and earned premium estimate yeah, you would definitely make.
To make that adjustment.
Okay, great. Thank you very much for the.
Thank you.
Happy to and thanks for the questions.
And once again as a final reminder, if you would like to ask a question. Please press star and one to withdraw your question you May press Star and two.
Again that is star and then one to join the question queue.
And ladies and gentlemen at this time in showing no additional questions I'd like to turn the conference call back over to management for any closing remarks.
Thank you operator, and thank you to everybody on the call today for your time and your interest we look forward to being back with you next quarter and if there's follow up questions, let us know.
Yeah.
And ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending you may now disconnect your lines.
Okay.