Q2 2019 Earnings Call
Good afternoon, ladies and gentlemen.
To Kemper's second quarter 2019 earnings conference call.
My name is Sean and I will be your coordinator today.
At this time all participants are in a way.
Later, we will conduct a question and answer session and instructions will follow at that time.
As a reminder, this conference call is being recorded for replay purposes.
I would now like to introduce your host for today's conference call Christine Worley, Kemper's, Vice President of Investor Relations Ms. worldwide you may begin.
Thank you Shawn good afternoon, everyone and welcome to Kemper's discussion of our second quarter 2019 results.
This afternoon, you'll hear from Joe locker, Kemper's, President and Chief Executive Officer.
Jim Mckinney, Kemper's Executive Vice President and Chief Financial Officer, and Dwayne Sanders, Companys Executive Vice President and the property and casualty Division President will make a few opening remarks to provide context around our second quarter results and then we will open up the call for a question and answer session.
During the interactive portion of our call our presenters will be joined by John Shelley Kemper's Executive Vice President and Chief Executive Officer, and Mark Green, Kemper's Executive Vice President and life and Health Division President.
Before the market opened this morning, we issued our earnings release, we published our second quarter earnings presentation and financial supplement. In addition, we filed our Form 10-Q with the FCC you can find these documents on the investors section of our website at Kemper Dot com.
Our discussion today may contain forward looking statements.
Our actual results may differ materially from these statements.
For information on potential risks associated with relying on forward looking statements. Please refer to our 2018 Form 10-K as well as our earnings our second quarter 2019 Form 10-Q and earnings release.
This afternoons discussion also includes non-GAAP financial measures that we believe are meaningful to investors one such measure that I would like to highlight again is as adjusted for acquisition.
It is clearly important to understand our reported results, including the impact of the Infinity acquisition has to Kemper. Overall. However, investors have also expressed an interest in understanding the underlying organic performance of the combined businesses.
Since our as reported financial don't include Infinitys historical information prior to the closing of the acquisition and our current results include the impact of purchase accounting the underlying trends are not easily visible in an effort to provide insight into the underlying performance of the combined business as we also display our financials as adjusted for acquisition.
This view removes the impact of purchase accounting and includes historical infinity information to more easily provide a meaningful year over year comparison.
And our financial supplement presentation and earnings release, we have defined and reconciled all of the non-GAAP financial measures forget where required in accordance with FCC rule.
You can find each of these documents on the investors section of our website at Kemper Dot com.
Finally, all comparative references will be to the corresponding 2018 period, unless otherwise stated I'll now turn the call over to Joe.
Thanks Christine.
Good afternoon, everyone and thanks for joining us on today's call.
Please to announce yet another quarter of strong financial and operational performance.
This performance wouldn't be possible without the determination focus of our associates.
To work every day dedicated to delivering outstanding results.
This quarter demonstrated our continued progress in growing our portfolio specialized businesses, which in turn has resulted in meaningful long term value creation for our shareholders.
We also took actions this quarter to further strengthen our balance sheet and enhance our financial flexibility Jim will provide more detail on these later in the call.
Before discussing the specifics of our quarterly results I'd like to note that on July 2nd we celebrated the one year anniversary of our acquisition of Infinity.
The transaction significantly accelerated our progress and becoming a leader in specialty specialty auto business.
Given kemper the scale to further enhance our product management claims effectiveness ease of doing business in expense efficiencies.
As we reflect on this anniversary I'd like to highlight three key points.
One we significantly exceeded every financial target, we announced at the time of the transaction.
To our approach to integration just created a premier specialty auto franchise and three we have a strong team of experienced insurance leaders with proven ability to drive profitable organic growth and to execute strategic and successful M&A.
All of this demonstrates our ability to enhance kemper's competitive profile and grow intrinsic value.
We look forward to deploying these skills across our portfolio of specialty businesses.
Now, let's turn to page four and review the highlights of the second quarter.
Overall, we generated industry, leading organic growth, while maintaining strong margin and balance sheet.
We continue to create shareholder value as demonstrated by our 39% increase in book value per share and 35% increase in book value per share excluding unrealized gains on our fixed maturities.
Well get on our return on average equity excluding unrealized gains on fixed maturities. We produced a 13.3% return in line with our stated goal of delivering a low double digit or are we.
We delivered strong improvements in the underlying fundamentals of our business earnings per share increased 152% to $1.84 per share while adjusted consolidated net operating income per share increased 97% to $1.38.
Earnings earned premiums grew 70% on a reported basis, 8% on an as adjusted basis.
And our specialty PMC segment reported very strong results with an underlying combined ratio of 93% and 10% growth as adjusted.
Well, we continue to have policy enforce gains in California, we saw an increase in growth across a wider range of geographies.
We previously highlighted that it would take time to deploy our combined strengths to generate these results. We're pleased to report that this quarter, we delivered double digit profitable growth outside of California.
We're pleased with the 3% earned premium growth in our life and health business as we begin to benefit from investments to improve our capabilities.
Despite some onetime benefit charges in the quarter. The business continues to provide stable cash flow and diversification benefits.
Our preferred PNC business turnaround continues as Weve said before this process takes longer and results are more volatile on a quarterly basis, then we would hope, but we remain committed to generating an appropriate shareholder return in this business.
From a financial strength standpoint, we currently maintain over 870 million of available in contingent liquidity.
This coupled with our strong current debt to capital ratio of 17.5% provides us with financial and significant financial flexibility.
With that I'll hand, the call over to Jim to discuss our consolidated quarter result.
In more detail.
[laughter].
Thank you Joe and good afternoon to everyone on the call, let's turn to page five to discuss the second quarter financial results.
As Joe mentioned this was another solid quarter for Tempur, we continue to generate strong topline results well growing profits and returns.
Earned premiums increased to 1.1 billion or 70% on an as reported basis driven by organic growth from each of our businesses and the acquisition of Infinity.
On an as adjusted basis earned premiums increased 8%, primarily the result of a 6% increase in policies in force within our specialty PNC business segment.
Top line growth improved underwriting performance and the successful integration of our Infinity acquisition led to robust growth and net income net income per share and adjusted consolidated net operating income per share.
Net income for the quarter totaled $122 million up 85 million from the prior year quarter net income per share on a reported basis increased.
73 cents to $1.84 on an as adjusted basis net income per share increased 90% <unk> dollar 90.
Adjusted consolidated net operating income per share on a reported basis increased from 70 cents to $1.38.
On an as adjusted basis adjusted consolidated net operating income per share increased 43% dollar 44. These results led to growth in book value per share and book value per share excluding unrealized gains on fixed maturities.
Moving on to page six.
We isolate the key sources of volatility in our earnings.
Adjusting for these sources of volatility our underwriting operating performance is relatively in line with previous year.
Kemper continues to benefit from the addition of the Infinity business, which is helping us drive strong growth in underwriting profitability within our specialty PMC segment.
I'll now turn the call over to Dwayne to discuss the results of our PNC segments.
Thank you Jim and good afternoon, everyone earlier, Joe noted the milestone anniversary of our Infinity acquisition.
I'd like to reiterate that the combination of our two entities.
Has been successful in accelerating our progress towards becoming a premier specialty auto franchise by leveraging our core capabilities and harnessing the strength of our talented and committed team we've achieved harmonized operations and enhanced revenue growth.
These efforts along with many others have resulted in a successful second quarter.
Looking at our specialty PNC insurance segment results on page seven as with the prior three quarters I will review this business on an as adjusted basis, including affinity results and all prior periods.
Earned premiums increased to 766 million for the quarter up 10% over the second quarter of 2018 policies in force increased 6% the topline growth remained above industry average well producing very strong profitability driven by our continued market and product strength.
We remain focused on generating growth and increasing market share while maintaining appropriate underlying combined ratios in the second quarter specialty autos underlying combined ratio was 93% largely consistent with the prior year.
We continue to further enhance our capabilities delivering value to our customers and generating disciplined profitable growth.
On page eight you will see the results of our preferred PNC insurance segment earned premiums increased to 189 million for the quarter up 4% over the second quarter of 2018.
The underlying combined ratio increased for the quarter to 94% I'll discuss the drivers separately by product line.
And the preferred auto business, we remain focused on achieving their appropriate underwriting margin in the quarter earned premiums increased 9% and the policies in force increased 3%, reflecting continued rate activity.
Turning to our homeowners and other business the underlying combined ratio was 83% roughly three points higher than last year, primarily driven by intra year development on non catastrophe large losses, our policies in force decreased about 5% as we continue to diversify our cat exposure. Despite a relatively quiet active cat quarter for the industry. We didn't experience the same magnitude of losses.
We've we've commented on this in the past, particularly when we've seen losses.
Proportionately higher than the industry and given the modest sized and concentration of our book industry results are not always a good indicator of our cat losses.
Well underwriting results in this segment marine below our profitability goals, we expect improvement actions in claims rate and underwriting will move us towards our desired results.
On a final note in July we announced that we entered into a marketing agreement to begin transitioning our classic.
Collectors book of business to Haggerty. This book had 16 million in annual premiums in 2018. The transfer is proceeding as expected I'll now return the call back to Jim.
Thank you Duane.
Our life and health divisions results on page nine of the presentation.
The team's continued focus on enhancements to our agency capabilities and process improvements resulted in earned premium growth of over 3%.
This quarter the operating profit for the business was impacted by higher one time benefit costs and an increase in expenses as we are enhancing our products and investing in our service and technology platforms to further develop our capabilities and target markets.
Turning to investments on page 10.
Our portfolio remains diversified and highly rated as demonstrated on the bottom left of the page.
Looking at the chart on the upper left you can see the investment performance over the past five quarters.
This quarter, we delivered 96 million in net investment income the core portfolio produced higher net investment income largely due to the addition of Infinitys investments.
This resulted in a pretax equivalent annualized book yield of 4.7%. This is down from 5% in the second quarter of 2018 to the shift in asset mix driven by the addition of the Infinity portfolio.
On page 11, we highlight our strong capital and liquidity position.
In the second quarter operating cash flows increased 30 million to 148 million compared to the second quarter of last year.
This was a result of increased scale and disciplined operational and financial management.
Turning our attention to the chart in the upper right of page 11, you can see that our insurance groups remain well capitalized.
In the upper left hand corner chart, you present parent company liquidity during the second quarter, we took advantage of favorable market conditions and the ability to replace expensive hybrid securities with permanent capital to further strengthen our capital position in May we repaid a 35 million term loan with cash on hand in June and a series of transactions. We raised approximately 130 million through a common share offering entered into a new $50 million term loan.
And increased the borrowing capacity of our revolving credit facility to 400 million.
Subsequently in July we used the proceeds from the equity offering together with a portion of the new term loan to redeem 150 million, 7.375% subordinated debentures due 2054.
At quarter end, we had substantial financial flexibility with 313 million in cash and investments and 660 million and borrowings available from our revolver and our subsidiaries.
Our debt to capital ratio at the end of the second quarter was 19.2%.
As a result of the aforementioned capital actions taken after the quarter close. We currently have 213 million in cash and investments and our debt to capital ratio has decreased to 17.5%.
This action.
Decreases our long term weighted average cost of capital and provides us with high quality capital structure with appropriate flexibility.
With that I'll turn the call back to Joe for closing comments.
Thank you Jim.
Our long term perspective remains focused on building kempers overall value and this quarter demonstrated our ability to do so in three key areas.
First our financial results highlight the strength of the insurance platform, we have built.
A disciplined approach to our portfolio of specialized niche focus businesses again produced revenue growth solid earnings and shareholder returns.
Second the continued earnings are we in tangible book value accretion obtain from the Infinity acquisition show the value, we're able to create through a disciplined approach to acquisitions.
Lastly, as Jim just discussed we continue your further enhanced the composition flexibility of our capital structure.
Thanks to our entire team our strategy and business model continues to perform well expanding kemper's reached your sort of specialty markets with easy to use affordable and appropriate insurance and financial solutions.
Now, we'll turn the call back to the operator to take your questions.
Thank you.
We will now begin the question and answer session.
To ask a question you May press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then too.
Our first question today will come from Greg Peters with Raymond James. Please go ahead.
Hi, good afternoon I wanted to.
Revert back to slide seven and your presentation and I noted that on an as adjusted basis Your policy and policies in force were up almost 6%.
Can you talk about where that growth is coming from is it coming from UBS expanding their geographic footprint or is it in your existing states and can you also dovetail comments on that wet conditions in California and Florida.
Mhm.
Thanks, Greg what worldwide you doing maybe you give some comments and we'll tag team a little bit Yep got it so.
The I think the first part of your question was the.
The 6% is that is that coming from new markets are in places that were.
We we.
Currently play.
So we are growing in that in existing markets and.
This isn't an introduction of of new states, it's actually expanding the growth in existing and as we've talked about before in terms of kind of diversifying the book.
A way from the concentration out west we've we've been able to successfully successfully do that.
And continued to add add pip on that side.
And the second part of your question can you can you ask that again I'm going to make sure I got that.
I was conditions in California, and Florida.
Yeah. So.
I.
From a from a market perspective, we you know we are you know we feel good about where we are.
We have an opportunity to continue to grow in California, even though we're a sizeable player there and that that continues to show growth.
In some of our other core states, you know whether that be Texas, or Florida, we feel we feel the same about both of those we continue to find opportunity.
We watch the marketplace, we look at the other players and kind of get a sense of what they're doing and how they are responding in that and then we.
We move.
No the business forward to how we think it's going to turn out to design with the desire kind of outcome. So.
You know again, we participate well in that space and and we're going to continue to watch those and take advantage of the opportunities that are presented to us.
Okay.
Greg Greg are you trying to get at is I think were going was getting at and we were talking about it earlier the.
The the marketplaces, we're seeing a little bit more competitive activity in Florida.
But still feel like we're goodwill about condition could well position to there.
And California is still a reasonable environment, we're not seeing anything crazy from a competitive perspective. There is that what you were trying to get at with that I think that yes, absolutely and and.
Note with your expense ratio being so low that that that's got to be a critical advantage for you guys, but can we pivot to slide eight.
And I wanted to just spend a minute and you talked about the underlying loss ratio in auto trending up and I know you said don't get too hung up on one quarters result, but can you give us a sense of what you mean bye bye.
The impact from business mix and and for the auto what's your longer term target.
Yeah, Let me, let me give a shot at that and then doing.
Provide color were not to be back and Greg actually make this comment.
With slide eight on preferred but I'm going to actually expand that a little bit and make a similar one on specialty.
What we're seeing in both of these business.
Businesses is some mix impact and I'll use specialty is the example first.
You know you were you were asking about growth, we're still growing in California.
But but probably closer to the state's population growth rate or maybe a little more.
We're seeing a bigger growth in that in Texas, and Florida, We're seeing some very high percentage growth in some geographies outside of Texas, and Florida, and California, but they are more modest states for us. So if you add it all up.
The Pip growth most of it came outside of California.
Yeah Big chunks in commercial vehicle when we look at the the programs.
As an example, our commercial vehicle business runs a little higher expense ratio, but has a better loss ratio our alliance United product in California has a more attractive expense ratio largely because its fee income, but we as a result, it can run with a higher loss ratio, we're running all of those thinking about the total combined ratio.
So you can get some quirky thing sometimes when the mix is shifting where it looks like the expense ratio is running up for the loss ratios move in a different direction.
Because of any intentional thought processes on our part about how that mix works together.
It's more appropriate to have that expense ratio in commercial vehicle is more appropriate to have the fee structure, we do in alliance United and as a result, we manage the loss ratios on differently.
Similarly in preferred as we look across the different states.
Where we are growing and we look across the different products, we have whether it's our new prime product or some of our legacy products in some cases they have different commission.
Ore expense structures and as a result, they have different.
The underlying loss permissible loss ratios that can cause some geography difference between the components of the combined ratio.
We don't typically provide target combines which I think was the last part of your question we do.
Referenced the fact that we.
Our targeting targeting a low double digit or are we.
And once that's achieved growing the organization and you can do some capital assumptions in each of the product lines that it will get you.
Close to a target, but given that the mix of product lines, we have it becomes.
Not a great idea to get individual targets, we started very precise at that point.
Those are great answers.
The last night.
Go ahead, Greg This is Jim Mckinney, and if I can add on I, just I don't want folks to potentially.
Missed this.
If you look at pages kind of 37 and 38 of the supplement.
There we provide the underlying combined ratios as adjusted where we've essentially kind of normalized the purchase accounting adjustments.
What you will see there is through six months for our specialty auto business.
We've got an underlying of 92.7% versus a year before that of 93.5.
And if you look at just the.
Personal auto within side specialty.
Which is on the supplement page 38, you can actually see we're running a 93% combined ratio for.
The first six months of this year on an underlying basis, which is about 0.1 0.2 roughly in line.
With where we were at a year ago, So you're seeing that while we have continued to.
Obviously grow faster than the market continue to make.
Market share gains both in terms of California, and then now you're really starting to see a pickup outside California, where we continue to demonstrate the same consistency in margin, but at that same point in time picking up.
Policyholders much faster than than what the market is it's growing.
Jim Jim's highlighting there Greg the.
There is some purchase accounting numbers that run through with with sort of quirky quarterly pieces.
And they have a swing one was a help last quarter and one was a hurt this quarter. So if you're picking up the expense ratio and you're trying to do sequential quarters, you're hedged going to scramble on that which is why we've got the as adjusted and which is why really looking at the six month numbers on 37, and 38 does a much more accurate job of projecting what the underlying trends of the business our.
Without getting into the quirky purchase accounting piece, but there's enough going on in those two quarters of T. gap stuff on the expense ratio that you could easily make the wrong conclusion that something was going south.
Right. Thanks. Thanks, those are those that's a great color I just the final final question I know there is others want to ask questions. Just can you just broadly talk about frequency in severity across your book in auto and how the trends were in the second quarter.
So I don't think were largely outside of industry on on the frequency piece, where.
It continues to.
So.
You know I guess behave well.
On the severity side, we see a little bit on the on the on the B. I side, particularly in California, I don't think we're seeing quite there what what industry is seeing.
But that's you know that again I don't think were unique industry at large.
Otherwise otherwise maybe somewhat more moderate based on our limited distribution.
So.
I don't think anything else to add on that or any other color.
Okay. Thank you for your answers.
Our next question will come from Paul Newsome with Sandler O'neill.
Please go ahead.
I was hoping we could turn to the life insurance.
Business.
And if you could help maybe parse out the piece that is.
One.
Truly one time, the mortality and morbidity pieces, you're talking about as well as.
Talk to more about these expenses.
Obviously.
It's a pretty substantial earnings impact if we have a.
A new run rate.
This quarter.
Yeah. Thanks for a great question.
I'm going to take it in a couple of pieces here just to hopefully help try to keep it simple and then we can come back over the top if that's all right.
The first one you know and I think the simpler one to kind of roll through.
Is really inside our life component within the life and health segment inside there you've seen.
Really a one time kind of benefits increase of roughly.
$3 million inside that group, 100%, a onetime from that perspective. In addition to that you saw roughly $2 million of expense that would be one time.
Items that are there.
Again.
Purely episodic related to some investments in the business and then you saw a couple of other items that are inside if I were to phrase it about $2 million inside that segment that would be.
I wouldn't say sporadic in nature, but they're they're onetime they're not items that you wouldn't necessarily expect to see on a quarter over quarter basis, but you might expect us to you know incur that expense on.
At 12, or an 18 month type period.
In some of the items that go into that include expenses associated with some rate filing preparation and some other things around.
In our life business, they are a little bit less frequent than what you might normally see on the PMC side, and so that can create a little bit expense noise.
On the health side, you saw really.
As we've highlighted called out about $4 million related to a one time.
Really review of the business and as we've continued to see a little bit of well good growth inside that business and as we become more seasoned what we saw is similar to what you can see and some other things we had.
Some older claims are in there and a few additional ones that are going to end up settling a little bit higher than what our initial assumption. Once that's not really a run rate impact per se in terms of what we're seeing coming in but it represents really the catch up of multiple years of business inside there and just us having an enhanced view in terms of what might be some of the severity associated with some of those.
Older or long dated claims nothing to kind of overly kind of think about or try to run rate in terms of your numbers really kind of one time.
In total and then when you look at some of the other things you see that in total.
We've shown good growth inside that those that segment. The net result of that is a little bit of upfront expense pressure that comes in again the remaining component there was about $2 million.
And what you see there versus say in the PNC segment, and it's really kind of a.
Commission design program. If you will is that some of the benefits that earn out over time, where you'd normally DAC again not to get too much into the accounting.
Because some of these additional costs aren't specifically subscribed to a particular policy that you have an upfront expense associated with them versus seeing that kind of over the life of the policy.
So there there there are part of the business, but it's not again something that I look at it and say hey, as our underlying cash flow projections gross margin sustainability inside the business segment change I don't believe it has the way I would think about that if I were modeling out the life and health segment is look at the run rate over the last 12 months I think that'll give you a good indication of where things would be I don't see any real material changes.
From that and I really don't see any material rate changes from where I'd expect the year to date turned out from what our expectations are.
Great and then my second question could you just give us a little bit more color on the investment side you had.
A fairly remarkable.
Investment return this time around it sounds like alternatives helped Oh well.
If you talk about sort of the sustainability of that as well.
Yeah, Paul Thanks, Yeah, I think we feel good about overall investment portfolio the results.
That we both achieved this quarter and over time, there is not a meaningful change.
Well, there's no change relative to the strategy or how we manage that or how we pick things I think what you're seeing is just the benefits of our.
Continued execution in that capability, we think we've built out some strong.
Investment.
Skill sets and we think that those have played out over time and then nothing there to note this quarter versus any others, just really continued day in and day out execution.
Okay. Thank you.
Our next question will come from Gary Ransom with Dowling and partners. Please go ahead.
Yes. Good afternoon I wanted to talk about competition also say, though when I look across the market companies are all standard companies standard auto companies are looking to grow.
They involve reached acceptable profitability or gotten close and I just wondered if you're seeing any change in the.
In the nature of the competition, whether it's coming from other companies that are maybe broadening their appetite and I'm really just trying to get a sense of the level of competitiveness that you might be seeing in the market.
Yeah, Hey, Gary This is Duane I, yeah, it's it's still a relatively far market I I you know I don't know that there's additional players in the space. You know sometimes you will you know we'll watch the activity obviously and then you know in the states we participate.
You will see some pricing move in.
And it's particularly you know in the specialty market and we're you know we state we stay focused on that but its not I am not seeing new players I see the same players I still see coal volumes are still in place. So <unk> nothing materially materially has changed its not like.
What we're seeing.
Others that weren't participating before they are now participating on the cohort of competitors or or or fairly consistent.
Okay, we're answering that Gary assuming you're asking the question of our people sort of crossing streams and moving from preferred into non standard and then we're not and we're not seeing a lot of softening in standard. There is Duane is it fair to say a little bit more competitive dynamic going on in the preferred space, but not to where we've seen it being really stupid no pattern that's out there they're jumping description.
Is that what you were getting that Gary yes that is what I was getting at yes, yeah. Thank you and.
One other thing I noticed in the Q on in commercial auto it mentions.
Frequency of claims as a contributor to the lower loss ratio. There is that any kind of trend or is that just a random variation in the quarter.
Yes, I think we look at it as you know we like to think that it's good execution in selection when it happened for several quarters in a row will confirm that.
I don't think the books big enough that it shouldn't be purely random you know given its limits profile.
But but I'm not sure I'm ready to declare that we've got you know two years of of dramatically less loss trend. It's just for that and for the period, we saw some much business and lower frequency.
We're pretty good at this end of the market and intend to do a nice job of tracking attracting a good underwriting profile.
And it was that commercial book a book that you think you can grow as well.
Yeah. We've we've had several years of double digit profitable growth. So we're thinking that's way more than a pattern. We believe we can continue to do that.
Where we're at the small end of that commercial vehicle you know around dealing with 5000 vehicle fleets were dealing with.
123 vehicles, a couple of more artisan contractors.
We're filling a void in the marketplace.
It it matches up well with our specialty auto business.
And we're we're operating it.
In a particularly thoughtful way, we're not getting caught up with some of the other noise or challenges that that other folks I think have in the commercial auto space.
Very much like specialty auto is different than preferred auto.
We're playing in a a section of that market that that's different and we think.
Like I said, there's been I think mid teens growth for.
You know more than two years I I, just don't remember off my head was because I've got it right and I haven't seen any statistics in my head.
Quite as well as the Kemper ones.
Right.
All right. That's helpful. Thank you very much.
Our next question will come from Adam Klauber with William Blair. Please go ahead.
Hi, Thanks, good afternoon.
But on the life business as Jim you said that look at the last I think four quarters. So.
Does that include that.
This quarter that are going to get a bunch of one timers in the you know what you consider a run rate.
No I would take the previous kind of four quarters, Adam from there and I think that'll give you a pretty directionally accurate number I would not include this particular quarter.
In terms of that run rate.
Okay, you might start with the base, but but from an estimate in terms of how I, how I'm looking at it modeling what I would expect to happen kind of given the information I have now.
I'm I'm basically looking at where its been over the last four quarters.
Previous to Okay, and nothing in that thesis is changed.
And then as far as the loss ratio on the or the benefit ratio in the life business.
This is the second time, you adjust to the three quarters.
Is you and I've always thought of that business has a lot of small policies. So I'm surprised to see you know this much adjustment. This adjustment in the last couple of quarters. So is there a pricing issue is it changes in mortality, what's the dynamic that's that's causing this variation.
No Adam I think you know unfortunately, little wonky normally there's kind of one quarter a year that you end up a little higher than what you were anticipating from a frequency of occurrence and you usually get one quarter, where it's a little bit lower.
When you're looking at kind of this run rate.
You know.
It's more of a and I don't mean this at an official but if you are kind of flipping heads or tails and I don't mean, it's not like it's purely sporadic but in terms of what creates that noise. You know it could be a flu season, it could be a bunch of different things. This year. It happens to kind of be inside this quarter again I would not look at that is being some type of trend or different.
Standing from where its historically done it's just on for an unfortunate pattern and.
You know nothing's going to really change there from the long term.
Underlying economics of the business, it's not lost on an <unk> loss on its Adam its two of the last three and that starts to feel like it's a pattern in the other direction.
But what we're telling you when we dig underneath it and are looking at all the components.
Our best guess is the.
For prior excluding the current quarter is the best view of what it is going forward.
And it's just hard without getting into a level of minutiae that you that I don't think you really want to get into the sort of see the underlying pieces.
Yeah, I appreciate that and I know, there's a lot that goes into benefit ratio.
Are you changing or is there a need to change your pricing in the.
These are the wafer and aged product.
The the life business, we've made some pricing changes.
In the last year year, and a half they were not related to any of the benefit issues that we're talking about they were relating to our broad view of mortality tables, the investment environment all of the underlying components and assumptions that we have got inside of the product and where our mix was going.
So they were disconnected from this.
We've been in the process of making some some pricing changes in our health business.
Over the last two and a half years and that behaves in some cases, a little bit more like a PMC business when you're thinking about it from a pricing perspective.
You know, where there's a there's a frequency of severity or you're working trends you're working mixes it behaves a little more.
Like an auto book might and were plugging along with those constantly looking at those.
And moving this will certainly factor into our thought process.
Inside of that space.
But again.
Their 12 month policies and it will work its way through.
You know much like you were changing prices inside of homeowners, but.
Theres nothing we've seen.
In the last those two of the last three quarters, where you saw one timers that suggesting to us that we have our pricing assumptions off.
So so I answered the question on pricing action, we're taking I think what you're getting at is is there something it makes us change our view on pricing because of those losses and they have not materially view may change our view there.
Okay, Adam just to put them you know, it's roughly a 4 billion dollar serve up basically five you know average life policies of 5000 box. So when you're thinking about that 0.1% change kind of on your frequency or other elements right can have a.
Can have a swing like this.
And that's just not when you when you're thinking about kind of what's normal volatility thats just not outside of what you would expect with a book like that of that size.
Okay, and then on the expense side for life and health again the.
You know last year, you had a run rate of.
Whatever 70 to 80 million jump up to $87 million.
Why did jump up this quarter I mean is it related to the jump up in the losses total separate and what were they both hit this quarter.
Can you help us it and I want to make sure Im answering the question specifically can you point me to what exactly you're looking X. I don't want to.
Sure. So instead of a long question.
Sure the insurance expenses.
Twoq.
Two Q. 18 were at 79 million and then for two Q1 9, where it got it 79 for going to the 87, one yep Yep Yep got it.
You know you're dealing with theirs.
It's it's some one timers we had.
A couple of Bucks running through there that are across the place we expanded some call center staffing.
That reflects the fact, we made.
We've made some investments to expand our ability to grow that business.
And some of those come in front of that growth. We added some E application capability. We've added some agent recruiting and training we stepped up the growth that occurs inside of that space, Minnesota was sort of a one time ripple through related to some agent.
Sales trips, we had they can plan in place for how they qualified for the trips for the whole year.
We brought online the new capabilities and you can't change the comp plan and a trip qualifying plan in the middle of the year.
That's not a good thing to do with the distribution population. So they got the benefit of the new capabilities.
With benchmarks that were set with the old capabilities because those costs are not associated with an individual policy either associated with everything they wrote over the entire year you can't DAC those they wind up being expensed in the current period.
We won't set up that that plan to run that same way now that the new capabilities are there.
We.
Deployed some.
One time changes in some of the actuarial consulting resources you were using for the firm and we brought them online and Thats running through the time period. So its a series of smaller items.
That taken together.
Become a not insignificant dollar item.
And candidly, we could have spread them out over time, a little bit so it didnt. It didnt pop, we actually thought that the right answer was too.
Make the investments and move those items at the appropriate timeliness to see the benefits as briskly as we could.
Okay, and then sorry, sorry, I didn't mean to ppt to death, but again, there's pretty good variation this quarter in that business. So historically, we've always sort of thought of this business as.
More of a steady state business that to do of course, it can bounce around a little quarter, but.
Going forward should we be thinking of it as a steady state business or is this one that quarter in quarter out you can have decent swings in the numbers.
No I would think about it Adam is a fairly steady state business with.
Somewhere along the way you're going to get one quarter effectively that has a little less frequency than youre expecting and one quarter, where you generally are going to have a little bit more for the total of the year.
No change in terms of what your overall expectations are.
When you're going through as I mentioned earlier to when you're trying to think through the expenses in that you know in a sum total.
You had.
Just under 5 million Bucks that was related to volume items again, those are expenses coming out it will be we will get the benefits are essentially over many years right, but that expenses upfront in different from where you had investments that were close to $5 million inside the quarter right that again those are expenses have been incurred but the positive benefit of that.
You know, it's going to be for many many years average life. The policy 17 years right, that's coming in but again expense up front.
On that front.
And then you know again some of those other one time expenses that you know Jos a loading to another three and a half million Bucks you inside those types of items that are coming across again would not expect those types of items too.
Repeat but the benefits associated with them do and so big picture.
I continue to look at the business very much in line with what you've historically seen.
We're bullish about the fact that you know, it's starting to grow a little bit it's not there is going to have huge growth.
Double digit growth or anything like that but we're excited about the 3% growth.
And we think that the business that you know continues to you know enhances cell from a competitive position and capability standpoint that is good for the overall franchise overall and I wouldn't expect any other changes.
You know from a cash flow or volatility perspective.
It's just a little a few onetime things that we're doing now to to further enhance the business.
Okay. Thanks, Thanks for the answers.
Our next question will come from Christopher Campbell with KBW. Please go ahead.
Mr. Campbell Your line is now live.
Oh, Yes can you hear me.
We can Chris go ahead.
Oh, sorry, sorry about that I had to meet still on.
I guess first question is how should we think about the organic growth potential and specialty personal auto and then commercial auto.
Well, we we are feeling good about the growth we've generated in both segments of the specialty business, we don't give guidance on gross or revenue going for going to give guidance on earnings either.
So the best I can tell Ya.
Is it I might think about it that.
Well, we've seen a pattern of fairly strong fairly consistent growth out of both sections of that business. We've got.
Very attractive combined ratios I think if you did.
A little bit of math.
But you would probably come to the conclusion that if we were targeting are delivering a it overtime a low double digit or will we see that those businesses are likely exceeding that target.
We've expressed before that we think the best way to build long term shareholder value is once we meet that target to grow the business as much as we can.
So that would suggest that that we're we're willing to let a little bit of that margin deteriorate.
To make sure that growth continues.
And then it becomes a bed that any one of us can have.
Come on.
Whether the market conditions continue where they are what happens to frequency and severity.
And whether or not we can still squeeze out.
Some more capability improvement from what we are doing and bringing these two companies together.
But I think the net is were in a pretty strong position now it would be hard to imagine those conditions could change in a single quarter or two.
Got it and then it sorry go ahead, Joe pipe side have had tried not to give any guidance, but I think I generally pointed you to in some ways to think about it.
Okay, Great no I appreciate that and then so but if you're thinking about those two lines. I mean, you know just and you know more of the personal auto side rates are coming down fairly dramatically and some of your states like California et cetera. So how should we think about like just your willingness to grow in and a softening market.
Well I don't think we're seeing rates come down in the specialty.
Auto that's what I was answering were you asking about preferred.
Well I'm not understanding yeah, well I mean like kind of what I'm thinking about is if you look like the top 10 auto writers like by State you look at California, I might have been like 9% in 2017, and Thats come down over time, So I guess it would be more biased towards the preferred side.
Yeah, we very much think of these as two separate markets.
They roll up through the same stat line and they are very different markets.
And when we look inside of our specialties, what's going on in California is very different than what's going on in Florida.
So we're we're specialists and when we look at each one of those individually.
So the market conditions of pulling statewide data for auto in total is going to is going to not be a great picture of what we're seeing at street level in terms of what we're going after.
So so I think the premise is off a little bit.
The way I might might describe it to you Chris is.
If you.
Think about.
Book value.
Creation and the shareholder value accretion over time.
We would suggest that that if two companies started out both at a 96 combined.
Or 93 combined.
And one tried to maintain that margin and the other said you know I'm willing to let it creep up a little bit to something like a 95 or 96, or 97, which might generate that low double digit our OE and grow and the other said I'm going to try to just preserve that margin and I'm willing to sacrifice the growth.
My sense is you would you as a shareholder have a much better shareholder returns from the one that was growing the book of business at appropriate margins, but not trying to maintain exceptionally strong ones than you would have in the group that tried them just purely maintain the margin.
And I think if you back up 20, or 25 years ago, you could find one or two.
Examples of each of those.
Investment thesis and how they were executed in the market by stock companies focused on personal lines.
And then be pretty obvious, which one you would have wanted to pick on that process, which when grew shareholder value more.
So we're focused on on generating that long term.
Shareholder growth, which is.
Hitting the appropriate returns.
And growing as much as we can so if our choice was to trade two points a combined ratio now for four or five points of growth we would.
Okay, Great and then are you noticing our I mean are there any like hot spots in terms of states I think one of your competitors had pointed out like Georgia, like especially around the Atlanta area and I know that was like something that infinity was working on.
Like that and then Florida, we're kind of hot spots for that competitor are you seeing any any uptick in loss costs in those markets or any other ones.
Not not in particular, no, especially on the two that you mentioned on the Georgia side that that is an area that were the infinity Yang is focused on and and and you know, we're still small but growing in Florida.
You know Weve again were bigger player there and we continue to watch.
You know for anything you know early signs of something that might cause a little bit of pressure.
As I mentioned I think in an earlier question around.
I think the severity question on on VI, and I mentioned that we got to we got a little bit of pressure in the VI side on California, but.
Outside of that we're not we're not seeing anything material.
Got it and you are not seeing any like pick up in litigation in auto like I know that they recently passed some laws like trying to plug up some of like the homeowners abuse like and for all that happens there and I was just curious if if by plugging that off any of that might spill over into auto like.
I think maybe that's like the next thing that the plant as far I want to once you attack down there.
I mean, it will be interesting to see what the future holds but at this point, we're we're certainly not seeing anything run over.
Okay, great well, thanks for all the answers best of luck in the third quarter.
Thank you.
As a reminder, if you would like to ask a question you May Press Star then one.
At this time there are no further questions in the question too and this will conclude our question and answer session.
I would like to turn the conference back over to Mr., Joe locker for any closing remarks.
Thank you very much operator, and thanks, everyone for your time today and all your questions and your interest in Kemper, We look forward to updating you again next quarter have a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.