Q3 2022 Kemper Corp Earnings Call
<unk> is limited to $100 million.
During the quarter, our asset liability management philosophy resulted in an equity gain of approximately $20 million moving to page eight.
We maintained significant capital and liquidity positions at the end of the third quarter, we held a healthy liquidity balance of nearly one 4 billion the increase in liquidity relative to the second quarter was driven by the aforementioned $300 million life dividend.
Over the next year this will provide incremental improvements to future core portfolio in that investment income I'll now turn the call over to Duane to provide details on our P&C segments.
Thank you Jim and good afternoon, everyone moving to page 10, we will begin with our specialty P&C business details.
They are all experienced sequential underlying combined ratio improvement of two points were more than offset the incremental severity, we experienced in the quarter through rate and non rate actions.
The segment policies in force declined about 14% year over year and earned premium down two 7% for the same period.
This quarter for private passenger auto we exceeded our expectations for filed rate filing an additional 16% on 7% of the book.
We plan to file for an additional 5% on 14% of the book in the fourth quarter. At this stage, we have four seven points of earned rate an increase from two four points last quarter.
In the fourth quarter, we expect three one points of additional earned rate.
The incremental benefits of earned rate and underwriting actions are expected to more than offset fourth quarter normal seasonality with incremental net trends leading to at least according to sequential improvement in ppas underlying combined ratio.
Our commercial vehicle business continues to build momentum with strong results in the quarter.
The year to date underlying combined ratio, including third quarter seasonality with 92, 7% year.
Year over year net premium grew 34% and policies in force grew 16% the strength of the underlying business model and our ability to continue to achieve rate will enable us to continue to profitably grow this business.
Now, let's turn to page 11.
Preferred auto experience a sequential underlying combined ratio increase of two four points driven by slight seasonal increase in claim activity and metal severity, we continue to make progress towards offsetting severity through rate and non rate actions.
Looking at the chart on the upper right, we filed for an additional.
Additional 18% of rate on 40% of our preferred auto book during the third quarter.
And have two five points of earned rate, we're planning to file an additional 15% of rate of 9% of the book in the fourth quarter. We also expect one five points of additional burn rate in the fourth quarter.
Although actions will take time to earn into the book the pace will accelerate in the fourth quarter and throughout 2023.
Now I'll turn the call back to Joe.
Thank you Duane.
Turning to our life and health segment on page 12 profitability improved due to two primary items first COVID-19 related mortality declined we've now experienced two quarters of sequential decline consistent.
Consistent with national trends mortality is above pre pandemic levels are trending back towards pre pandemic levels.
Second we had solid investment performance driven by our high quality portfolio and new money yields increasing long term spread margin new rates are exceeding yield maturities by approximately 100 points.
Additionally, life, new business sales continue to be at pre pandemic levels. These items provide a favorable tailwind to restore the business to its pre pandemic levels of profitability from a run rate perspective, we anticipate this will occur in the back half of 2023.
I'll now turn the call back to Jim So he can share additional details on the strategic initiatives.
Moving to page 13.
And we outlined initiatives that will strengthen our competitive advantages and accelerate our path to target profitability.
These include programs to enhance and optimize spend within enterprise.
Enterprise expense and real estate.
In total we expect to achieve annualized expense savings in excess of $150 million.
The cost to bring these savings to fruition is between $150 million to $200 million pre tax charges and will be incurred over the next three years a portion of this expenses noncash to.
To enable tracking the table on this page will be provided quarterly with our earnings update.
Actions display here underway do you expect to start to earn some of these benefits in the fourth quarter. The majority of benefits will be realized by the end of 2023 with additional savings in 'twenty four and in 2025.
Turning to page 14.
As we've previously discussed the offshore captive I'm going to start with the transformation of our P&C performance businesses to fee based models to the incorporation of a reciprocal exchange. An example of this model is eerie.
If youre not familiar with this model, it's an alternative way to structure an insurance company.
In this configuration Kemper will be responsible for the day to day management of a carrier owned by policyholders will be paid a fee for our services and will be removed from underwriting risk.
Over a five to seven year period, we expect this will free up over 50% of the capital. We currently have deployed to support these underwriting activities.
In addition, it will provide meaningful tax advantages that we'll use to optimize pricing.
The aforementioned capital release will largely be back ended due to the time it will take for the carrier to become self sufficient and for us to subsequently consolidated from.
From a timing perspective, we're at an advanced stage of our planning process and intend to submit our plan to regulators before year end, we anticipate beginning to write business and number six well in the third quarter of 2023.
Excited about the long term prospects of this insurance model and will continue to provide updates on further investor calls.
I'll now turn the call over to Joe for closing remarks, Thanks, Jim.
As a reminder, we recently published our 2022 ESG report updates include enhancement to our ESG transparency with new disclosures aligned to the sustainability accounting standards Board you can read more about these topics in the report available on <unk> Dot com.
In closing I'd like to reiterate that the strategic initiatives, we announced today are aimed at improving our company and strengthening our strategy over the long term that will enable us to continue to expand our market share in our core businesses and improve margins, we're continuously enhancing and advancing platforms and capabilities that help us better serve the affordability.
Ease of use needs of our specialty in underserved markets.
We aimed to decrease capital requirements lower costs enhance customer product offerings and reduce our risk profile. This will better position us to serve the needs of our customers and employees and provide significant long term shareholder value.
Finally, I'm confident our actions will generate the necessary results to restore underwriting profitability and make us a stronger organization.
Today, we have four five points of earned rate running through our personal lines auto books don't Miss the fact that based on actions already effective by this time next year, we will have at least 19 points of earned rate running through these books.
Further our operating model enhancements with advanced capabilities in our expense initiatives will drive further cost advantages.
As always I want to thank our employees for continuing to strengthen our company serve our customers and ensure a bright future.
Now turn the call over to the operator for questions.
Thank you we will now start today's Q&A session. If you would like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed by <unk>.
Glenn. Thank you ask your question. Please ensure your phone on mute locally.
Our first question today comes from Greg Peters from Raymond James Your line is now open.
Hey, good afternoon, everyone.
So a lot of information and I appreciate the slide deck.
I guess my first question would just start off from the specialty PC insurance segment.
Some of your peers have reported some continuing adverse development.
Some reserve charges it seemed like you avoided that this quarter.
So maybe you could come on on the state of your reserves and then secondly on rates.
Looking at the table that you put on page 10.
And it still seems like there is some rate opportunity. So maybe you can give us some color on what's going on state by state.
Okay. Greg this is Jim.
Start with the reserve question will tag team are Duane and Joe will jump in on the rate I can call if theres something thats there.
Big picture from a reserving perspective.
We feel pretty good in terms of where that obviously as we've indicated previously.
We tried to have a forward view of where these things are going we try to make sure that we understand each of the underlying pieces and what has to be true.
For those things to come to fruition and.
Those things are included in our viewpoint, we get a lot of data on a day in and day out basis and on a quarterly basis.
Enables us to kind of a very thoughtful quarterly pick in to watch that through.
Secondarily I'll remind folks when you think about a 50 50 pick.
From a confidence perspective that comes into that we look to have a 60 plus percent generally confidence.
Especially in an environment like this with that picks. So there is a I don't want to say conservatism because its the consistency with which we apply to that but.
But I think those elements.
Come together.
Highlight both our reserve reserving philosophy and why you can have good confidence.
And the quality of our loss ratio picks in the quality of our balance sheet.
Okay.
Yes, I'll take a start Greg.
The rate piece and see if theres additional comments after.
Look we've been taking a lot of rate and we will continue to take a lot of rate. This only shows three quarters on slide 10. So don't forget there's rate, we took and the ones that are sort of rolled off that page.
For historical information, we didn't try here to present the totality.
That is why I gave you sort of that cumulative.
Over the last year and a half what's been running through.
We are.
<unk> outside of California, basically taking a full rate indications and whenever they are available.
<unk> more for the large part we've done that at this point.
When the right indication show that there is an ability to file for more rate we will.
The story in California, There is no particular news to update I think you've probably seen that.
Approved a couple of individual companies right programs.
They've got an election on Tuesday, we continue to watch the environment.
And and we will continue to appropriately file for rate there and move forward once the ones. We have are approved.
That's helpful. I guess my second question strip.
Strategically <unk>.
You've announced.
A bunch of moves.
Particularly interested in the potential divestiture of the preferred business.
And of course, the establishment of a reciprocal.
So.
Obviously, youre not going to share with us everything thats going on but maybe you could establish some guideposts on how the board and management is thinking about these.
These important moves that you're making and how we as investors should be looking at them on a quarterly and annually annual basis as you deploy the whatever strategies you've.
You've announced.
Sure and Jim and I will tag team this a little bit maybe I'll start with the Pi.
And then on the other the other pieces of the enhancements and Jim I think as <unk> outlined a couple of those guidelines, but we'll add a couple more.
On top of that.
We're in a strategic review process with personal insurance.
We understand that this is a challenging environment for most of the P&C personal lines industry at this point.
We've seen our combined ratio start to drop and I think youre still seeing a lot of folks seeing.
Seniors climb.
That would make this a challenging environment to go through that thought process.
We are looking at every option we have.
In terms of how to think through that business.
And what we can do on our own or what might make sense with another partner and we're going to need a little time.
To work through that I don't imagine that will take us.
More than a couple of quarters to have a point of view on how to resolve that it made it will likely take longer than that to complete whatever we're doing.
But we will have a point of view there I just highlight for you that it's a.
A challenging environment for everybody.
In this space now and that's going to impact the optionality.
Greg from a reciprocal standpoint.
Yes, I like kind of where we start from a principle based perspective, we're always looking for ways to enable ourselves to be able to provide customers with the lowest.
Potential pricing that we can.
For the quality products that we provide the reciprocal structure has several benefits of it but.
One or two of them that are really notable.
The positive impacts that.
That's there from a capital perspective in terms of lower charges things of that nature.
For the policyholder.
Well as some tax benefits and things like that that are inside there. When we look at that model you start with that customer standpoint, it's something that can help us advance the ball further.
Elongate some of the pricing advantages in that that we have and it's also very positive.
For the remainder of our stakeholders that be ifs.
Effectively the stockholders of the company as.
As well as employees.
That pricing advantage that gives us further competitive advantages inside the markets makes us stronger more stable enables us to grow over the longer term in an accelerated way, making us a further stronger company from that perspective, and then again, removing some of the volatility or the elements that you would see from a day in day out model perspective.
Active that would be in.
In today's model I think is good for essentially our stockholders and so this is our move in that direction. We've been working on this for a while and where.
We're excited to continue on that path and to unlock these benefits both for our customers and for our stockholders.
Yes.
The last the last.
A copy of the reciprocal strategy sounds really interesting just from a capital perspective, Jim It sounds like.
I mean.
Youre going to have to have capital to establish the reciprocal exchange at the same time.
Are you going to get.
The capital from your your existing subsidiaries.
Move it over to the I guess I'm, just trying to understand the sequencing of capital movements.
The entities.
Yes, so we'll start with.
A surplus note and other from a capital perspective. It will then obviously create over time. This is one of the reasons. It takes five years to seven years to fully appreciate those benefits, but then that surplus note rate will become repayable as you go forward in the future as the reciprocal in and of itself become self sufficient again that will take.
About five to seven years.
To fully come to fruition, but that capital benefit is.
Very meaningful that comes there for our customers.
And it will obviously provide meaningful capital to the organization.
Whole in terms of R. R.
Our ongoing endeavors.
Continue to grow the business or.
If the right option there is the return on the capital we will return the capital. So both of those things I think are big positives and effectively that's how we're gonna start.
Got it makes sense thanks for the answers.
Thank you.
Our next question today comes from Paul Newsome from Piper Sandler. Please go ahead.
Good evening, thanks for the call.
Little bit follow up on the reciprocal idea is the idea here then essentially the reciprocal would start with its own.
Rash policy.
Licenses and.
[noise] filings.
He will be independent from what you currently have.
Is there some sort of transfer process that happens.
It would.
And then I guess mechanically how would that.
Sure.
Would you be transferring the brokers that simply starting to new business can be cyclical and then loading.
Good good.
Good question.
I'm sorry to interrupt you I thought you were done.
I'm good thank you.
No. Good question, what we'll do is we will start and create a fresh entity with fresh licenses and fresh filings.
It will be in many cases mirror the products, we're using already and we will write new business into that entity.
If we took state acts and we started doing it we would stop writing new business in our old entities.
All the new business in the new entity.
As Jim mentioned, you started with a surplus note to get capitalized and then as it takes.
The surplus contributions that are part of the policy or the premium and the underwriting profit. It makes it and it is generating its own capital over time.
We will fill it up so what will happen.
The new business gets written there and we stopped new business in other entities.
It will gradually naturally shift over very similar to how you sometimes you'll see a company doing open book closed book strategy really change products and use a different legal entity inside the organization and the old program winds down and the new one grows this will do to do the same thing.
And that in that process and that's again part of why it takes a little bit of time, because it transfers on new and because it has to build up its own capital.
That makes sense.
The reciprocal.
This is just for the specialty business it wouldn't be for the preferred or the would it be for the commercial business as well or is it separate.
Yeah. Good question at this time it is intended to be for the personal line the P&C personal lines underwriting.
As we go forward. So we've got to go through complete essentially our strategic review of Pi, but depending on what direction. It would also be included on this depending on what the outcome is that review.
It will be the K, a PPA underwritings the commercial business. It has the potential to go through here, but our intent at this stage.
Is for it to continue to write in the entities.
That it is currently and this is the current benefits and where we think about it.
At this point in time, there is a very clear benefit for the PPA side, it's a little bit more.
It's a little more cloudy, if you will and whether or not there's that benefit but if it were to produce that benefit then we would head in that direction again. So we can provide us but right now it's the intent for the PPA writings to go through that.
And to be clear, Paul we're going to start with the specialty PPA ending.
And be working there.
Will.
Agree, 100% with Jim, but we'll we'll complete our review strategic review of Pi.
Before we conducted any any opportunity to move in that direction.
That's great and then I guess I'll ask one question.
I wanted to know kind of the cash flow process.
Life captive.
Does that tie to the operating cash flow negatively.
Year to date.
And.
And I guess relatedly.
<unk> captive was that purely a statutory capital amounts is essentially holding less are able to hold less capital in the captive or is it.
Something that you were able to do with the life reserves.
As part of the transfer.
So Paul if I understand correctly I'm going to answer and if I don't.
Get to what you're looking for please ask a follow up on this.
Big picture, it's 100% consolidated with ours first of all.
Second of all.
When we went through with the transfer any of that we then received an extraordinary dividend.
That effectively went to the holdco.
From essentially.
United or the entity that was essentially holding.
The reserves today.
From in terms of what Youre going to see on an ongoing basis is going to act and.
In the same way that the rest of our business to US. This is a statutory capital release versa and trapped capital versus essentially.
Our GAAP capital in terms of where you're at.
In terms of our ability for uses.
Other elements.
We obviously have the same freedom and then if you're thinking about kind of what that reinsurance structure. It looks like it's done on a funds withheld basis. So.
Happy to talk to any questions. If you've got them further inside there, but hopefully I'll hit on the points that you were you were hoping I would touch on.
No.
It's just a question of like how much capital is actually in the captive versus what.
Got pulled out of the insurance subsidiary.
Difference there is it fell about $400 million fully.
Theres still about $400 million of capital that's inside the entity.
As we continue to work through.
So the benefits as you go forward just the natural you would expect another $100 million or so to come out over the next year or so that will go to the holdco.
And Youll see us run.
The life entities are very similar ratios that we've run at.
In the past, obviously right now were much higher than that but that really should be highlighting kind of the strength in.
Just where we're at from an overall position there.
Okay. Thank you very always appreciate the help.
Our next question today comes from Brian Meredith from UBS. Your line is now open.
Hey, good evening, a couple of them here for you.
First just on the.
The operating model enhancements here, so I just want to make sure I understand this correctly. So in theory over the next couple of years, we're going to see your LAE ratio declined by two and a half to three points and also your expense ratio I think if I look at $60 million to $70 million run rate, that's about a point to point and a half on your expense rate is that the way to kind of think about.
It maybe real estate optimization, a little bit more.
Brian I think youre thinking about it the right way.
Now again different prizes.
Would be there, but yes, if you just extrapolated to where we're at today that is the right directional answer.
Yeah.
Excellent.
And then second question I'm, just curious obviously, you've put through a lot of rate increases so far where are you with respect to rate adequacy right. Now you think on your book of business as far as what you filed as of today.
Reason I'm asking is is there a point at which we could maybe start to see some sequential improvements in Perth, obviously, excluding California, because that's a different animal.
Yeah.
Hi, This is Duane yeah. Good question I'd say outside of California, where there were largely rate adequate and we continue to I think as Joe mentioned, we're looking at indications on a regular basis and we'll address that should we need rate.
Yeah.
Got you so youre in a position to perhaps start to grow again outside of California.
Yeah, that's what we're trying to be careful with our words here, so I'm going to be.
<unk> about it.
We believe we are rate adequate we believe that there is still a significant inflation in this inflationary environment around so we'll remain.
For the moment modestly cautious outside of those geographies.
We're going to see that rate earn in I want to see a little bit more on what inflation doesn't make sure that we're following up with the right behind it because we don't want to be behind.
Again, we want to get back out in front of it so.
Will.
<unk> be.
Be a little tempered and when we step on the gas.
And the only other piece that I would add is that in that.
It's your position in the marketplace relative to others. So sometimes is that are we.
Moving in tandem when we move differently and so depending on how that.
How do you find that in the marketplace will also dictate our ability to grow.
If our prices are higher than everybody else because we moved earlier, we might not be growing because were not competitive if not interest in underwriting filter it we might be.
Customers can choose the person who choose to buy when the person is still inadequate.
Got you that makes sense and then last just a quick question I'm just curious.
Post Hurricane and I know some things happened in Florida from a regulatory perspective, one of them I believe is that they've suspended you should file.
It changed your all your kind of outlook in Florida, right now as far as where you are with respect to.
Growing up in that state are doing stuff in that state.
No not at this time again, Florida has been one of the states where we've been.
Very active in terms of trying to get us in the right place from a rate position.
And we will continue.
Those rules change will continue to abide accordingly.
If we have to go through an approval process on that on the front end as some of the other states that we do.
Do than that.
What we'll do a lot of times, what you find is the states had an official.
Regulatory category using file filing news prior accrual however, they describe it and then there is how do they function.
They may be changing some of the rules. It doesn't appear that they are changing here in terms of how they function.
In what they're doing.
And to clarify sort of my last thought Brian I don't want to leave.
My last comment to suggest we think were price uncompetitive.
I think we've taken a lot of rate, we think we've gotten ourselves rate adequate.
But.
Doing Dwayne point was generally you've got to be responsive to what else is going on in the market and what's happening there.
We're just seen.
I've seen the same shopping activity to St moving activity the same other activity.
And we will.
Being that spot I still think we have a very strong competitive advantage.
Tractive expense profile and attractive ability to.
To serve our customer needs and I think when were.
Confidence is time to grow the abilities there.
Great. Thank you.
Our next question comes from Matt <unk> from JMP. Your line is now open.
Next I had the question Jeff.
Next question is from Gary Ransom from Dowling and partners. Please go ahead.
Yes, good evening, a lot of my questions on the reciprocal been answered, but I have a couple more the way you seem to be describing it sounds like you put in a surplus note you write some new business if things go well you put in another surplus note you write some more business that process continues over this.
Five to seven years, and I'm trying to understand exactly what you mean by the transition at that point are you, saying that that's when it's self sufficient and you don't have to put any more funding into it or are you self sufficient at that point, because you've already gotten all of that all the surplus notes back and you can be consolidated at that point.
Yeah. So good question.
You may not have all of the surplus notes back, but you would be self sufficient from guy you wouldn't necessarily need to be putting any more capital and from that perspective.
Reinsurance or other elements that you would look at and it's making earnings along that journey and those are building up and at that point in time, it's self sufficient for.
Writing new business or other elements that would come into the entity at that point.
The note into itself probably.
It's an extended term note right. It would come out in kind of normal course think about it like a 30 year mortgage or something to that extent right. Yeah, Okay, I understand and then.
When I think about the other reciprocals out there or whether you know Erie USAA farmers, there's a more of a.
Preferred writing bent to it here as being a little bit more shorter duration or shorter lifetime customers.
Just wondering if that.
Way affects how you are thinking about the buildup of the of that transition if youre kind of you have to cut some churn in your youth these customers a little more than other reciprocal.
So I think the remodel is a good model to reference I think what I would actually highlight and why I think this becomes more of a challenge necessarily for may be preferred or standard companies versus maybe specialty or non standard.
Is it just takes longer to move the entire business and to recover those benefits because our policy life isn't quite as long as what you would see right on that type of it actually happens faster.
So right Gary I actually think there's more benefits for someone like us or at least thats, what our modeling and other elements would suggest that its actually better and more favorable for us and the difference that you might be as if I was a 100% standard preferred and I didn't have it might be more like a 10 to 15 year.
Period before you got to that deconsolidation versus kind of our five to seven.
Yeah.
Great.
All other little.
A couple of other little detailed questions are you. When you were talking about tax benefits are you imagining that the premium the customer pays might be partly attributed to a capital contribution.
That is correct, yes, and so that component of it obviously creates that tax benefit has come through but if you think about that being maybe 50% of the margin that you might have you might think of it as small, but you might think of as large it just depends on how youre thinking about it.
Right.
And then were domicile or you're setting up the reciprocal.
So we Havent announced that there is a couple though that I would say too.
Three that were fairly deep and what we're working out the final details there on where it's going to be kind of the optimal location for us and so there'll be more detail.
Shortly.
It's not actually finalized yet.
Hey.
Alright and.
Yes, I guess, that's it I think I understand.
Thank you very much.
Thanks, a lot Gary.
Yes.
Yeah.
Our final question comes from Andrew Clark and then from Credit Suisse. Your line is now open.
Hey, Thanks, a lot good evening.
Just wanted to learn a bunch of playing so lot of good answers.
So just looking at slide 10.
With no overall impact it looks like Youll get a little less than 1% impact and I think earlier, you said that you feel like Youre pretty.
You said were there I think so.
Yes that illustrates that youre pretty far along.
Everywhere in California correct.
Can you can you.
Not seeing what Youre seeing Andrew can you help one more time with where you are in the 1%.
Yes in other words both from.
13, seven on written overall impact to 14, six so a little less than 1% impact or or multiplying the 14% times five in the fourth quarter. It doesn't seem like you need a lot more.
And hence your comment with there.
That reflects it right.
Yeah, I think what youre seeing in that overall impact column is the.
The written the impact of the rate that's working.
So I am not sure I would read a 13, 7% to 14 six has been a point and that's driving that what Thats, just saying is another quarter.
Another group of policies renewed or new.
The effective rate level and thats the weighted average impact on the overall book.
I think the earned rate is really what you want to look to in terms of how it's working through the earnings.
Because that's what's impacting the current periods of loss ratio.
The $4 seven you see in the third quarter I pointed out that.
The rate we've taken on the.
The overall book when you when you look at that it will come out to be about 19 points of earned rate by this time next year. So the $4 seven works up to a 700 million it'll be that number will be about 19 by this time point in time at least 19. This time next year.
And I think the earned impacts, which you want to what you want to watch.
Because that's what the eggs fully even snake and working through when we say we're about there.
You won't see it on the slide that becomes a state level price adequacy of rate adequacy analysis, and we were saying that we believe were about rate adequate in all states other than California.
Which means if there was no inflation already been they are what we expected over the next couple of months, we'd have rates that we are adequate for what we need now we got to watch what the inflation is because if that rises up then we're now inadequate again.
Again, that's that's normal ordinary course, if you expected it to be eight and it was 10 year two points light do you expect it to be 10, and its seven year three points heavy.
We're we've got some of those views baked into our pricing.
That's what's helping us say that we're on.
We're in rate adequate and everywhere roughly rate adequate every rather in California. In this business you can't quite pull it off the chart.
Right right I guess I was just getting at it just doesn't look like there is incrementally much rate to be taken going forward and I guess I would throw in non rate actions is that.
Care to look think about it that way that you probably across your entire book ex California.
Really not looking at much more than one or 2% in the next quarter.
I'm not sure. So this is Jim.
I would not look at it that way our actual rate filing activity is is on the page.
I think we're highlighting that we're either file at about 14% of the premium that will be impacted at a weighted average rate of 5%.
So.
Think that tells you what we're doing.
Generally outperformed kind of those numbers and I think if youre looking to say what is it that we're doing over the next quarter or two quarters others.
That's the right one to kind of look at when.
When you're thinking about the right side of the written earns into the broker what has essentially been priced against it right and this is telling you when you think about like.
The percentage of the book that had these pricing elements against it. This is telling you that that's at the 46 component right that that's working its way in there. So we just should be careful between the tables what were trying to express.
And I think the right one for you to think about if you are looking at what we're doing from a rate perspective.
Is what we're planning to do from a filing perspective, yeah. So on the left side of the chart on the left side of the dotted line is the incremental changes to the rate card in this time period.
The right side of the chart is the cumulative impact of all prior changes and our comments on rate adequacy or not represented here.
So what you could take away from this is that if we believe we will rate adequate in all states other than California now.
That we are already we are also planning on taking 5% of rate and roughly 14% of our book.
Because that is <unk>.
Eight indications and we are conservatively and thoughtfully, saying, we want to make sure. We're ahead of us not behind us now.
Now we were taking.
The weighted average rate of <unk> 19 in the two previous quarters, so were slowing down the pace.
But it's not as slow as you were thinking.
Alright.
Yes that makes a lot of sense of 14 times, five and maybe you'll do more after that but it makes plenty of sense and then maybe.
Again, I'm going to interrupt you for one second Andrew you might be like a 14 five might be one point on the whole book.
I think what youre trying to get whats more important to get is that when.
When we're going into those states, we're still looking for about a 5% rate increase not a 1%.
The impact on the whole book might be about one, but it's the right size and thats would be indicative of what we would be thinking in other geographies.
Your math on converting into an earn that much might might be.
Appropriate.
I don't want other folks to Miss.
Directionally, where we're saying we're going.
Yes, the only reason that we saw in there was just.
It feels like Youre coming towards the end of the line there and Thats why I, just sort of multiplied the 14th.
But I think we're on the same page.
No need to.
What we were trying to communicate Andrew is that outside of California, We feel like we're nearing rate adequacy that youre seen earned rate in and I think the last comment I made before we took questions are close to last comment was by this time next year, if we did nothing else.
We already have taken actions that are going to push 19 points of earned rate through this book.
All of that benefits comment.
Now we are going to do more on top of that but that's come in that's in the bank, it's just but for the passage of time it'll.
It'll come out.
And absolutely clear and highly significant and then maybe shifting over to.
The preferred business and the potential sale.
As we think about it with the loss experience being so challenged at this point in time.
It.
How much capital is tied up in the preferred business and.
Would you anticipate that you could get a premium to that value.
There may be a cost to that value how are you thinking about it.
Potential exit values on that business without being too specific lobbyist.
Looking through this is you made a couple of a couple of good points there.
And the conflict a little bit.
And one you highlighted that the.
Losses are challenge there.
And remind us that this is a difficult environment that would be putting downward pressure.
On our values and you asked if there was a premium which is an upward pressure we're going to go through a process I am not sure. This is the right forum for us to describe that before we've talked to potential.
Interested parties, that's what our work our way through that but you can do your own evaluation.
Of what you think the.
The business is current positioning in the market environment.
Okay fair enough as a secondary question in terms of the capital you can see this from various parties, but it's between four and $500 million. The reason that I highlight that range is just it's obviously dependent on underwriting mix of business things of that nature.
But that's essentially.
However, you're going to work through it that that's the capital that's pledged against the business.
Okay.
Helpful and then as I think about the reciprocal as I think about the captives that.
Were you able to extract $300 million.
How are the rating agencies looking at these two specific entity I know they are very different.
How where are you right now by the agencies on claim.
Claims paying ability.
Where would you see them coming out.
Right.
As we move down the line with each of these businesses.
So I would just highlight maybe.
And a inside the business, we expect that to continue.
When youre thinking about this.
The overall transaction.
Stronger right, we have a tighter or we have a higher RBC ratio, we have greater flexibility and we will be less leveraged as a company because of this all of those things are very positive right from a credit perspective.
And notice that what we're highlighting is our first priorities and our uses for capital is to maintain that very strong risk profile.
And so.
I would.
I would tell you I think these are all positives elements and we don't foresee any changes in terms of the.
The way, we're managing the business or other that would come through.
And any kind of change of ratings.
Terrific. Thank you very much.
Thank you.
There are no further questions at this time I will now hand, you back to <unk>.
For closing remarks.
Thank you everybody for joining us on our call today for your interest and your questions.
We're excited about where we're headed into making making good progress on restoring the underlying profitability of the organization and I think as we mentioned a couple of quarters ago, we were going to spend some time on.
What we referred to as home improvement projects and you're starting to see the fruit of those labors being brought online.
Forward to speaking to you again next quarter take care.
Okay.
This concludes conference that core earnings Conference call you may now disconnect.