KMPR - NYSE

Good afternoon, ladies and gentlemen, and welcome to Kemper's Second Quarter 2024 Earnings Conference Call. My name is Ina, and I will be your coordinator today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions 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, Michael Marinaccio, Kemper's Vice President of Corporate Development and Investor Relations. Mr. Marinaccio, you may begin.

Thank you, Joe. I'll begin on page 5 with our consolidated financial results. This quarter, we generated a fifth consecutive quarterly improvement in our underlying results in a third straight quarter of solid operating underage profits. Net income was $75.4 million or a $1.16 per diluted share and adjusted consolidated operating income was $91.7 million or a $1.42 per diluted share. These earnings translate to an 11.5% return on equity and a 17.6% adjusted return on equity. Previously, we described adjusted ROE as return on tangible equity. We have changed its name to more aligned with industry practices. Further details are provided in our non-GAAP disclosures. As Joe indicated, we expect to solidly beat the 10% return on equity guidance for the year and do not foresee trends that would cause earnings to meaningfully decline in the second half of 2024. Driving our strong consolidated financial results this quarter was a 4-point sequential improvement in Specialty P&C underlying combined ratio. Incremental earned rate exceeding loss trends and expense discipline were key drivers of this quarter's results. As we discussed during the first quarter call, we've been intently focused on expanding our new business writing and moving from profit restoration to growth. Through the monthly improvement in the underlying combined ratio in Specialty P&C during the quarter, we accelerated our production expansion efforts while maintaining a sufficient margin of safety. This resulted in a 4.6% sequential quarterly increase in PIF. Our swift return to growth highlights our franchise's strengths and competitive advantages. That said, given seasonal buying patterns, we expect sequential quarter PIF growth to moderate for the remainder of the year. As we return to a more normal operating environment and further expanding business writings, we anticipate that the combined ratio will migrate back to a more traditional range over the next four to six quarters. However, this will not be a linear transition due to seasonality and other market dynamics. Matt will provide further details on this later. Turning to page 6, our insurance companies are well capitalized and have significant sources of liquidity. At the end of the quarter, parent company liquidity was approximately $1.1 billion, consisting of revolver and inter-company lending capacity and holding company cash and investments. Our healthy liquidity balance allows us to pay shareholder dividends, interest payments, and support our operating subsidiaries. The P&C and Life businesses continue to improve their capital ratios. Specialty P&C operating profits and the preferred P&C wind down are helping to increase P&C capital levels. During the second quarter, the preferred P&C exit released $44 million of capital and an additional $50 million is expected to be released during the second half of 2024. This exit is modestly ahead of schedule and should release over $130 million of capital this year. Given the slower pace of capital release going forward, we do not plan to provide additional details on this initiative after this quarter. Regarding our balance sheet, we remain focused on reducing our debt-to-capital ratio. By the end of the first quarter of 2025, we anticipate that our debt-to-capital ratio will be in the high 20% area and, by year-end 2025, we expect it to be in the mid-20% range. This improvement will be achieved through operating earnings and debt reduction, including the previously discussed plan for the February 2025 debt maturity. Moving to slide 7, net investment income for the quarter was $93 million and our pre-tax equivalent annualized book yield was 4%. This quarter's figures were negatively impacted by a $15 million pre-tax valuation adjustment related to real estate investment. This is not a run rate item. We anticipate net investment income returning to more normal levels in future periods. Given the market interest regarding commercial real estate, we provide further detail on slides 13 and 14 of the earnings presentation. Here you will notice about 8% of our portfolio is in commercial real estate, of which over 80% is liquid or short-term. Overall, we continue to maintain a high-quality, well-diversified $8.7 billion investment portfolio and have had no changes to our long-term philosophy or execution. I'll now turn the call over to Matt to discuss the Specialty P&C business.

[Operator Instructions]. Your first question comes from the line of Gregory Peters from Raymond James.

I think the comments overall are bang on on the demand side. From a customer perspective, we've seen continued demand for our products. We're seeing it at an agent level as well. I think that's generally true across all markets when you think about the geographic dynamics that sit underneath there. And from a supply perspective, a carrier perspective, I think the story varies pretty greatly by market. When you think about California, Florida, that's where the predominance of our production, at least out of the gate has come from as we look to continue to methodically expand our business. We'll continue to grow on our other markets, but it's really a function of where the market is from a competitiveness perspective. When you think about the non-standard auto marketplace, competitors are re-engaging at different rates. I think some of the larger players are feeling more confident about their adequacy, yet they still maintain some underwriting discipline that's maybe more rigorous than a traditional marketplace, whereas the smaller players, the regional players, are a bit slower to react and stabilize there. And so, there's a lot of texture by geography, but both from a supply perspective and a demand perspective, I think generally feel good about our ability to balance. And as Joe said, as we continue to march forward on our re-expansion and our production, we'll be opportunistic about how we take advantage of the opportunities that are presented to us.

And your next question comes from the line of Paul Newsome from Piper Sandler.

When you look at net investment income overall, it was down about $12 million with respect to that real estate investment. So if you add that back, you're close to like a 105-ish type number, in line with where we were in Q2 through Q4 of last year. I'd expect us to be back there given where rates have been and continue to be and so forth. So think of this as a one-time – not a one-time, but a non-run rate adjustment this quarter. And then going forward, we'll be back up to where we were historically. Can you do me a quick favor and just re-ask the second part of your question with respect to Life?

Sure. I'm sorry if I'm not as coherent as I should be. So the Life operation earnings were down a lot in part because of that one write-off. But if you look at it more broadly, you have reduced a lot of the investment income in that item, in that line because of the capital moves you made. And I'm not certain where – I think I'm trying to get to a run rate of what the Life company earnings would be, given the changes in investment income in that line that have to do with not just the one time real estate write-down this quarter, but also all the other shifting done from a capital perspective.

And you're referencing the capital that we've taken out with respect to the Bermuda optimization. So I'd expect the run rate earnings in Life to be lower by about $15 million to $20 million as a result of that capital moved up to the parent over the course of a full year. And to be clear, the real estate investment, we're really telling you that that valuation adjustment has no impact on run rate. You're asking the question the right way. The capital distribution will shift it from Life to the parent.

[Operator Instructions]. Your next question comes in the line of Andrew Kligerman from TD Securities.