Q3 2024 Kemper Corp Earnings Call
Chief claims officer for P&C, and Jamba, Shelly Kemper's Executive Vice President and Chief Investment Officer.
After the markets closed we issued our earnings release filed our Form 10-Q, with the SEC and published our earnings presentation and financial supplement.
You can find these documents in the investors section of our web site 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.
Statements include but are not limited to the company's outlook and its future results of operation and financial condition, our actual future results and financial condition may differ materially from these statements for information on additional risks that may impact. These forward looking statements. Please refer to our 2023 Form 10-K and our.
Third quarter earnings release.
That means discussion also includes non-GAAP financial measures, we believe are meaningful to investors.
In our financial supplement earnings presentation and earnings release, we have defined and reconciled all non-GAAP financial measures to GAAP were required in accordance with SEC rules you can find each of these documents in the investors section of our web site Kemper Dot com.
All comparative references will be to the corresponding 2023 period, unless otherwise stated I will now turn the call over to Joe.
Thank you Michael Good afternoon, everyone and thank you for joining us today.
I'm pleased to report that we delivered another quarter of strong financial results. This was led by our specialty auto business, which again generated sequential quarter Pip growth and underlying combined ratio in the low nineties.
We continue to observe a hard market and increase consumer shopping behavior.
About liquidity.
At the end of the quarter parent company liquidity was approximately $1 3 billion.
Listing of revolver intercompany lending capacity and holding company cash and investments.
Our healthy liquidity balance allows a shareholder dividends interest payments and support our operating subsidiaries. It also provides us with significant flexibility to delever, our balance sheet and return capital to our shareholders.
Previously we indicated we would pay down at least $150 million of our February 2025 debt maturity.
However, given our strong performance we have increased this amount and now intend to retire the full $450 million at maturity.
This will further strengthen our balance sheet and increased financial flexibility by lowering our debt to capital ratio to approximately 25% by the end of the first quarter of 'twenty five from 31, 5% at the end of the third quarter.
Our capital and liquidity position has also given us the ability to repurchase shares during.
During the third quarter, we repurchased $25 million of common stock and we bought back another $10 million of shares so far in the fourth quarter.
We now have approximately $136 million of authorized share repurchases remaining.
We continue to believe our stock is trading below its intrinsic value and we will opportunistically buy back shares.
Moving to page seven.
Net investment income for the quarter was $111 million and a pretax equivalent annualized book yield is four 8% net.
Net investment income results were driven by higher new money yields and strong alternative investment performance will lag.
Last quarter experienced a negative evaluation adjustment within the alternative investment portfolio. This quarter's results outperforms.
In general we expect our overall net investment income to be around $105 million per quarter.
Both.
In the near term.
Speaker Change: Matt you were talking about these California, Florida, Texas Southern markets.
Speaker Change: I'm wondering if you can give us some texture on.
What you mean by hard market because it feels like some of them, maybe Florida, maybe Texas might be not as hard as California or give us some texture on how the market conditions are in each of the states.
Speaker Change: And what you mean by significant growth in the near term.
Sure.
Matt and I as you expect Greg we'll tag team that I'm going to start with <unk>.
Speaker Change: Comment or two overall.
And then maybe let me dig into the individual.
The nuances of the state dynamics.
Speaker Change: First.
Speaker Change: I would not read the on page eight the far right quarter on quarter Pip growth.
Totally telling you that this is.
Hard a hard market as they can get we're still in the process of what I call a rebalancing phase.
Youre seeing some of this year California's growing.
<unk> faster than the population in Florida, and Texas are growing.
Both faster than the population in faster than California.
Other states are not they're behind if you remember the last time, we had this slide up probably was back in late 2000 early 2001.
You would have seen those proportions, but you would've seen the other states are those expansion states growing even faster than Florida and Texas.
So I think youre going to youre going to see that.
<unk> to move going forward second overall comment is remember this is quarter on quarter not year over year.
It's not that you can completely multiply this by four but if you were starting to think of of four quarters in a row. These are fairly significant year over year growth rates. When you when you move them to a more annualized number.
Albeit that the other states arent back where we expect them.
Speaker Change: So we do expect as we move into next year.
Speaker Change: There's a strong belief inside of our modeling.
That if the choice where to run at a 90 591 combined ratio and grow at X percent or run at a 93 or 94 and grow at X plus 3% or 4% that the heart.
Speaker Change: Foster growth would be a better long term shareholder value creation grow the tangible book value per share grow the earnings base.
Grow the intangible co shared at a faster rate that would be a better answer.
What you've got right now.
Is that 91 and a half roughly combined ratio.
Speaker Change: It is benefiting from a fair amount of rate in excess of inflation, that's still earning in <unk>.
And it's benefiting from the reduction in new business, we had last year that reduction in new business penalty.
If you if you start with the premise that there is a new business penalty.
And you you stop writing new business for some period of time Youre going to get a short term boost from that.
Speaker Change: If you start writing new business, you're going to get a short term pain from that.
Just the change in those it's not.
You know 10 points on the total combined ratio it may be.
Speaker Change: Couple of points as it works its way through here, so what will happen over the next.
Four or five quarters.
Speaker Change: There'll be a a slower migration.
Into that more traditional 93 to 95 range and I'd encourage you to go back and look at what.
The company did through two.
Speaker Change: 2016, 17 18 1920.
There was a sort of consistent hovering inside of that range and there was a little bit of bouncing around inside of it.
Excuse me dependent on what went on but that but well migrate back there as the new business gets back to more normalized levels and we find the normal balance between.
Ongoing inflation inflation and ongoing rate changes.
We saw we recognized and acknowledged that historical buying patterns in this market and if you go back you know.
Five 810 years, you see generally less shopping in the second half of the year.
Speaker Change: What we've seen is we've got a hard market there's capacity challenges, there's a lot of rate.
That have pushed through Theres, a broad inflationary pressure that's moving on consumers. It's our belief that that that environmental pressure is offsetting what might be a historical buying patterns customers are behaving differently than they've historically behaved we saw that in the third the third quarter.
Speaker Change: And.
Speaker Change: I would take those two statements.
Speaker Change: And I'd, let you do your own forecast, we really do.
We don't typically do a top line, our revenue forecast and I hate doing a quarterly one.
So I'm going to avoid giving you the precise answer on what we think is going to happen in the next.
We're obviously basically a month into the quarter, what's going to happen in the next 60 days.
We haven't seen a material change in that shopping behavior in the last 30 days, but I'm not going to give you.
Our 60 day projection on that.
What I will tell you is we have a high degree of confidence.
That the the.
Buying season that normally experiences in the first half of the year will be every bit as robust as it historically has.
So so I think the more the more appropriate thing to be doing and thinking about is what's the next.
18 months look like and I expect that very confident in the first half of the year will be robust.
The next 60 days will be what they'll be I'd be surprised if it's if it's way off what we've seen but a couple of points here or there doesn't change that trend line.
Speaker Change: Makes sense. Thanks, and then my second question several companies have noted that frequency trends have been.
Speaker Change: Very favorable.
Speaker Change: Are you seeing the same and is that contributing at all to the lower underlying combined ratios that you're saying.
Brad: Hey, Brian This is Brad yes, we're seeing the same what I would tell you is it frequency kind of on a year over year basis Crofts, probably in the second quarter and it's come up a little bit, but overall on a year over year basis. It looks very attractive and can we expect it to remain attractive.
Brian: Great and can I squeeze one more in.
Any chance, we can get an update on kind of the rollout of the exchanges.
Yeah, It's a happy too and we have a very brief one it's it's continuing to work continuing to put modest amounts of new business in there and worked the plumbing out as we mentioned I think it was two calls ago.
Speaker Change:
I'd expect the premium volumes to be modest in there it probably for at least a year or two they will they'll continue to modestly increase.
We start with new business and there's some new business penalty in there so that puts it in earnings pressure on that and you need to let that book season, a little bit to where it starts to build up a renewal book, that's generating retained earnings to help build up the the equity capital in the exchange.
So you know it takes a little while to prime the pump.
Which is why it has a long time horizon on doing it the businesses is.
Moving in operationally, we're seeing what we expect to see.
Indicate we've added a couple of states from a licensing and product approval perspective, so things are moving.
Speaker Change: Generally as expected maybe a little slower than we had initially projected when we were talking about this and I think some of that's a reflection of of where the combined ratios are right now overall.
Speaker Change: And any opportunities we have on a on a.
Speaker Change: Direct writer carrier basis.
So it's moving as expected a little bit slower than maybe the first time, we talked to you about it.
Speaker Change: Makes sense. Thank you.
Thank you.
Your next question comes from the line of Andrew <unk> from TD call. Adam. Please go ahead.
Speaker Change: Oh I got back quickly.
Speaker Change: I wanted to ask you about right.
I know you previously had a slide.
Andrew: It showed how much weight was left to earn in could you talk about that in the private passenger airline and then it looks like in commercial auto with net premium earned at 13 and.
Pip at five and a half or no that's not a year over year number but.
Andrew: Has rate doing and and.
Speaker Change: In commercial auto as well.
Yeah as a general overall comment Andrew we stopped it displaying that particular chart. It was incredibly relevant over the last couple of years, because we had taken so much rate.
We had a surge of inflation and we were behind them. Then we had the surge of rate to catch up.
Speaker Change: When you file. It then there's a delay and it getting approved then it has to get written and it has to earn and we thought it was very relevant.
Speaker Change: To help sort of mechanically walk people through the process of of when the antibiotics. If you will were taken and when it was going to reduce the temperature.
Speaker Change: Of the combined ratio.
The that chart, if you pull out last quarter's chart.
I'm still works and there is no meaningful change in it other than advancing the ball one quarter.
Speaker Change: And.
Speaker Change: But what we described to folks in general is that a reasonable expectation for us in the foreseeable future.
We would be taking rate roughly equivalent to what we saw with aggregate loss inflation.
And a recognition that as we were adjusting our new business mix that would put a modest.
Modest pressure up on the combined ratio that would move us back into that normal range, but.
But you could do you could take a reasonable assumption that rate was going to roughly offset inflation.
Speaker Change: So it wasn't going to have a meaningful earnings impact one way or another there's a there's an FYI in that.
The financial responsibility limits in California.
Speaker Change: Our limits they they pushed up.
The minimum limits in California for policies written effective one 125, we had a rate change for that which we believe reflects the increased loss content that comes with that so it will show up as a rate filing and will come through as a larger rate per exposure, but we believe we are.
Priced it to match the increased underlying loss exposure. So it effectively goes with the same disclosure I. Just gave you the increase loss inflation will get matched by an increased rate.
Underneath that but that's the result of not overall loss inflation, but a limited change in the state that has the same bottom line effect and we believe we priced it to have no bottom line effect.
Speaker Change: I met a place.
Speaker Change: It applies to commercial as well commercial is largely the same.
We deal with rate filings there, there's some ability sometimes to adjust it at the individual risk levels on some of the larger exposures.
Speaker Change: And yes, it's very similar you can see that there's very attractive underlying combined ratios in commercial vehicle. We give you guidance on our long term targets and long term expectations for the specialty P&C combined because they have.
Similar long term expectations from those combined ratio perspective.
And we will operate them similarly, we'll try to keep them.
Speaker Change: In that you know.
90, 390 495 range.
And optimize the growth trade, there's no particular reason to become more competitive it is and it's not going to drive growth there's no.
There's no benefit to long term shareholder value to forego growth.
Speaker Change: Just for a short term improvement of margin.
Brett: I'm, sorry, Brett excellent.
Brett: Okay.
Andrew just as a courtesy to round out the year for you and your and your inner modeling the expectation of run rates in the fourth quarter was about two to three points.
Brett: Awesome.
Hope you have a great evening. Thank you.
Brett: Yeah.
Thank you there are no further questions at this time I will now hand, the call back to Mr. Joe Lacher for any closing remarks.
Thank you operator, and thank you to everybody for joining the call today.
Much appreciate it we're pleased to again spend the overwhelming majority of time talking about.
Profitable growth in the organization return of capital either through paying down debt or buying back shares and and and overall financial strength that we feel will let us capitalize on the competitive advantages of the franchise. So thanks for your time and look forward to talking to you next quarter everybody have a happy Halloween.
Thank you and this concludes today's call. Thank you for participating you may all disconnect.
Brett: No.
Brett: Yeah.
Brett: Yeah.
Brett: No.
Brett: Yeah.
Brett: Yeah.
Brett: Yeah.