Q1 2025 Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to Kemper's First Quarter 2025 Earnings Conference Call. My name is Constantine, and I will be your coordinator today. At this time, all participants are in a listen-only mode. Later, we'll 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, operator. Good afternoon, everyone, and welcome to Kemper's discussion of our first quarter 2025 results. This afternoon, you'll hear from Joe Lacher, Kemper's President and Chief Executive Officer; Brad Camden, Kemper's Executive Vice President and Chief Financial Officer; and Matt Hunton, Kemper's Executive Vice President and President of Kemper Auto. We'll make a few opening remarks to provide context around our first quarter results followed by a Q&A session.

During the interactive portion of the call, our presenters will be joined by Chris Flint, Kemper's Executive Vice President and President of Kemper Life; Duane Sanders, Kemper's Executive Vice President and Chief Claims Officer for P&C; and John Boschelli, Kemper's Executive Vice President and Chief Investment Officer. After the markets closed today, 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 website, kemper.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. These statements include, but are not limited to, the company's outlook on 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 2024 Form 10-K and our first quarter earnings release. This afternoon's discussion also includes non-GAAP financial measures we believe are meaningful to investors. In our financial supplement, earnings presentation and earnings release, we've defined and reconciled all non-GAAP financial measures to GAAP where required in accordance with SEC rules.

You can find each of these documents in the Investors section of our website, kemper.com. All comparative references will be to the corresponding 2024 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 proud to report that we delivered another quarter of very strong financial results, led by continued robust profitable growth in our Specialty Auto business. While we'll spend time drilling into these results, I know we're all aware that right now, we live in interesting times.

We'll talk about that, too. So today, we're going to do three things: first, review our first quarter results; second, discuss the current economic environment, including tariffs, our capacity to respond and our associated resilience; and third, discuss our near-term outlook. Now let's move to Page 4 and jump into our first quarter results. We delivered net income of $100 million, a return on equity of 14% and a return on adjusted equity of 21%.

Book value per share and adjusted book value per share grew by approximately 13% and 16% year-over-year, respectively. We returned our debt-to-cap ratio to the low 20s. And we delivered a trailing 12-month operating cash flow of roughly $520 million, which is quickly returning to our all-time peak levels. Our core businesses continue to perform very well.

Specialty Auto generated a healthy 92% underlying combined ratio while producing strong PIF growth of nearly 14% year-over-year. Written premiums grew a very significant 24%, foreshadowing a similar increase in earned premiums in future periods. We continue to see strong demand for our products and expect significant growth to persist. Matt will provide more texture on this later.

The business fundamentals underlying our Life segment remains stable. The business continued to produce strong return on capital and distributable cash flows. As mentioned earlier, we continue to further strengthen our capital and liquidity position. Brad will discuss our financial results in more detail later, but overall, we're very pleased with our first quarter results.

Moving to our second topic, I want to acknowledge there's a lot of macroeconomic noise in the market, especially regarding tariffs. The President made clear his affinity for tariffs while on the campaign trail. As such, we've been taking their potential impact into account since his election last November. We believe Kemper is fairly tariff resilient for several reasons, now let's walk through them.

First, tariffs do not change long-term ongoing inflation but rather have a onetime, upward movement. Tariff delays, existing parts inventories and similar factors should spread the loss cost impact over several quarters, allowing for a reasonable response time. Second, tariffs principally impact the vehicle damage component of auto loss cost and not bodily injury. In broad terms, about half of our loss costs relate to bodily injury and therefore, are not tariff-impacted.

Of the half related to vehicle damage, about 2/3 of that is related to the vehicle itself and replacement parts. The balance relates to things like body shop labor rates, rental car expenses, towing charges and other non-part costs. Together, this means that only about 1/3 of our loss costs are directly exposed to potential tariff-related cost increases. This weighting is both driven by and further enhanced by the nature of our Specialty Auto book of business.

About half of our customers buy liability-only coverage, meaning we do not cover first-party vehicle damage. The majority of our customers buy policies with minimum limits, thus further capping our exposure to third-party damage. Third, we are starting from a very strong position with a low 90s combined ratio and significant growth. We are very well prepared to navigate the pressure and remain within our long-term margin and growth ranges.

And finally, we are well positioned to quickly respond to ultimate loss cost impacts. In Private Passenger Auto, we utilized 6-month policy terms for over 90% of our in-force and 95% of our new business policies. This means our book is highly responsive to any necessary price increases. There's broad market awareness, including with the insurance departments, of tariffs and their potential impact on loss costs.

This impact will be readily visible, and we are confident that insurance departments will respond appropriately with ordinary course rate filings. And substantially, all the nonrate tools we utilized in recent years are currently available to protect the book as any needed rate increases move through the system. We can respond quickly. Matt will further comment on some of these topics later.

Again, we believe we are reasonably tariff resilient and are well positioned to successfully navigate these interesting times. Turning to our third topic, let me comment on our outlook. We have a very focused set of Specialty businesses with refined, sustainable, competitive advantages. These businesses are favorably positioned to deliver profitable growth throughout all parts of the underwriting cycle.

We're in a strong financial position, a low 90s combined ratio, 24% written premium growth, strong returns on capital and growth in book value per share. Our auto businesses have solid tariff resiliency and possess the capacity to nimbly and swiftly respond to any likely tariff-related cost impacts. Bringing these factors all together, we remain confident in our ability to manage the business within our long-term margin and growth ranges. With that, I'll turn the call over to Brad.

Thank you, Joe, and good afternoon. I'll begin with our financials on Page 5. For the quarter, we reported net income of $99.7 million or $1.54 per diluted share and adjusted consolidated net operating income of $106.4 million or $1.65 per diluted share. These results continue to demonstrate that our businesses are strong and are creating significant value for our shareholders. As a reminder, 2 key metrics we use to track our performance, our return on adjusted equity and adjusted book value per share growth.

Return on adjusted equity was a healthy 21% and growth in adjusted book value per share was a solid 16% year-over-year. These metrics demonstrate the strength of our performance and the efficiency of our model. Moving to Page 6. Here, we highlight the strength of our balance sheet. Our capital and liquidity positions are excellent and are supported by a healthy balance sheet with wealth-funded insurance entities.

Over the past year, we generated $520 million in operating cash flow, approaching the all-time highs from the 2018 and 2019 time frame. We anticipate continued operating cash flow growth and expect to exceed the all-time high with trailing 12-month cash flows exceeding $600 million in the second quarter. Our cash flows and operating performance provided us the opportunity to do two things. First, it enabled a repayment of $450 million of senior debt in February.

This improved our debt-to-capital ratio to 22.9%, which is approaching our long-term target range and represents an impressive 8.1 point improvement since last quarter. Second, it allowed us to repurchase $4 million of common stock during the quarter. We have approximately $130 million left in our share repurchase authorization and continue to believe our stock represents an attractive value. Overall, we have significant financial flexibility to support organic growth, navigate market volatility, pay shareholder dividends and interest and repurchase additional shares.

Now turning to our investment portfolio on Page 7. Net investment income for the quarter was $101 million. This was below our quarterly guidance of $105 million due to lower returns from alternative investments. On a rolling 4-quarter basis, we continue to believe net investment income will average around $105 million a quarter and will gradually increase throughout the end of the year. Given the tariff-induced market volatility in April, we want to emphasize that we maintain a high-quality, well-diversified investment portfolio.

Currently, approximately 95% of our fixed maturity portfolio is investment grade, of which 71% is rated A or better. This helps provide stability during periods of volatility. It also gives us the flexibility to shop for underpriced assets when market conditions allow. With the recent market volatility, we are taking the opportunity to purchase attractive risk assets to create incremental value over time.

Before turning it over to Matt, I want to reiterate that we are well positioned for long-term profitable growth. Our core businesses are generating strong results. Specialty Auto is expected to continue to grow profitably while maintaining combined ratios below our 96% ceiling. The investments we made to enhance our capabilities over the past 5 years give us confidence in our businesses to generate shareholder value going forward.

I'll now turn it over to Matt to provide further details.

Thank you, Brad, and good afternoon, everyone. Turning to Page 8. Our Specialty P&C segment continues to yield healthy margins, producing a total underlying combined ratio of 92.2%. Private Passenger Auto produced 92.2% and Commercial Auto produced 92.3%. Shifting to production, we are very pleased with our results this quarter.

For the segment, written premium grew 24%, while PIF and earned premium each grew around 14%. We remain hyper focused on profitably growing the book, and our new business loss performance continues to be well within our lifetime pricing targets. Dropping into some perspective on our key states, California continues to see very strong growth, supported by a hard market backdrop. We are confident in our pricing adequacy, customer and agent demand for our products remain strong, and our deep understanding of the market supported by our enhanced tools gives us confidence in our ability to profitably grow this business.

The Florida market is becoming increasingly competitive, largely driven by the favorable impacts of tort reform. As we previously stated, we had a deliberate wait-and-see approach and wanted to see the results of these reforms earn in before we adjusted pricing. Additionally, since November, the increased background noise on the potential impacts from tariffs supported this approach. That said, some competitors have taken aggressive pricing action, modestly pressuring near-term production.

As the full impact of tort reform and tariffs work into the market, we are well positioned to navigate this environment and expect profitable growth in the state. In Texas, we were intentionally a little slower to ramp up production until we refreshed our pricing plans. Those changes went live in the middle of the first quarter, and we are now seeing positive momentum. Similar to Florida, we expect profitable growth in the state going forward.

Our Commercial Auto business growth remains very strong, complemented by consistently favorable underwriting results. This business grew written premium by over 27% and PIF by approximately 19% year-over-year. Both new business and PIF are more evenly balanced across our core states. We fully anticipate further profitable expansion of this business supported by its competitive advantages.

As Joe mentioned, our business is well positioned to navigate the upcoming tariff changes. We entered this period with strong underlying results and solid pricing adequacy. We have continued to enhance our pricing and underwriting capabilities that enable both flexibility and speed. We have a demonstrated track record and ability to flex our rate and non-rate actions to address any changes in the environment.

Additionally, the composition of our Private Passenger Auto book offers advantages over traditional standard auto carriers. Approximately 50% of our policies carry liability-only coverage and exclude tariff-exposed, first-party collision and comprehensive coverages. 90% of our book is written at state minimum limits. This means any tariff-exposed, third-party property damage liability is capped with a low limit. And over 90% of our in-force book and 95% of new business consists of 6-month policy terms, which enables frequent book re-underwriting and accelerated earning of rate.

In closing, our Specialty Auto business is delivering very strong earnings and growth. We expect tariff impacts to be a manageable, onetime pressure on a subcomponent of our loss cost being realized over several quarters. We are confident in the competitive strength of both our Private Passenger Auto and Commercial businesses. We are well positioned to continue to profitably grow our business at a 96% or better combined ratio.

I'll now turn the call back to Joe to cover the Life business and closing comments.

Thank you, Matt. Turning to our Life business on Page 9. As noted earlier, the underlying business continued to generate stable operating results. Mortality and persistency were in line with historical trends. The Life business continues to generate strong return on capital and distributable cash flows.

Turning to Page 10. In closing, I'd like to reiterate the highlights for the quarter. First, Kemper delivered very strong operating results. This was led by Specialty P&C's underwriting performance, double-digit, year-over-year PIF growth and roughly 24% written premium growth. We delivered an adjusted ROE of 21% and grew adjusted book value per share of 16%.

Second, we're entering a potential tariff-disrupted macro environment from a position of strength. The competitive advantages of our Specialty business provide tariff resiliency. And finally, we continue to improve our capital and liquidity position. We've reduced the debt-to-capital ratio toward our long-term range and are producing operating cash flows approaching all-time highs.

I want to take a moment to thank our entire Kemper team for their efforts. These results would not be possible without their commitment and hard work towards achieving our goals. Over the last couple of years, we've invested significant effort into building a stronger, more resilient company preparing us well to navigate the current market environment. We remain confident in our ability to create long-term shareholder value.

With that, operator, we can now take questions.

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

I wanted to, for the first question, focus on your commentary about market conditions in Florida, Texas and then in California, where you say hard market conditions still persist. I'm wondering if you could build out on your opening comments on those markets. You're producing substantial PIF growth and just wondering about the durability of that growth as we look for the rest of the year.

Sure, Greg. Thanks. I'll take a shot at this, and I'm sure Matt will have some other comments on it. Look, the California growth numbers are strong.

You'll find that it -- they likely temper slightly in California as we move into the second and third and fourth quarter. Part of that is just the timing of when we sort of restarted new business and rebalancing work their way through, but you'll also see an offsetting fairly significant increase in Florida and Texas. Those numbers for Florida and Texas, both, on a year-over-year basis, should move more towards a high single-digit, potentially low double-digit, but probably high single-digit for the 2 of them. Some of those, they're -- the trough -- if you think about a rolling 4-quarter basis, the trough for Florida and Texas is a little later.

And as Matt pointed out, there were reasons why we were a touch slower in the last quarter and are accelerating. So a high degree of confidence that those will move up into that high single-digit PIF growth range in California will sustain. So we'd expect -- I'm not giving you guidance. I'm not giving you a specific number.

I'm trying to give you a general durability, but we'd be surprised if the PIF growth wasn't still solidly in the double-digit range.

And just to add a couple of quick comments to that. California, the market there, we're still seeing limited suppliers in that marketplace, which is providing a favorable backdrop for us. And when we think about the other component of durability in California, it's the economic performance of that business. We feel really good about our pricing adequacy in that market with the tools and our intimacy.

Florida and Texas, as mentioned in the prepared comments, we have a series of enhancements we put in the first quarter in Texas that are now starting to take hold. And Florida is a pretty competitive environment that we continue to move our product and position for profitable growth, but have an optimistic outlook in both of those markets.

Okay. I guess my follow-up question would be -- I think the Manheim Used Car Index is out. And I think it was up in April compared with March in -- on a year-over-year basis. So maybe there is some mild inflationary pressures in the system.

I'm just curious, given that the underlying results are in line with your expectations, how are you viewing your competitive positioning on a price perspective? And do you anticipate any filing for additional rates or tweaking any of your rates in any of your markets?

Yes. You got a bunch of things going through there, Greg, and I'm going to try to hit each of them, but actually pull it up. First, we've got a very strong, combined -- or underlying combined ratio of the 92%. Matt pointed out that in Florida, there were positive trends, underlying loss trends related to their reform items that we expected we would take into account in some of our pricing to become a little bit more competitive there.

We tempered that a little bit as we were watching and digesting the effects of tariffs. I'd be surprised if the net result of what we did in Florida wasn't becoming somewhat more competitive to reflect the net of those items, and I'd expect we do that. Texas, we made our changes that were largely a class plan implementation, so that may have pockets of competitive impact. It wasn't like we -- it wasn't, I mean with the base rate up or down.

It was a segmented pricing change. So we'll have that there. And then the balance of the comments really come back to how we've talked about loss trend before. We spent a couple of years where people want to talk about the Manheim Used Car Index, and we repeatedly come back and say, "That is one minor component of total loss cost trend." We price to total loss cost trend, which is frequency and severity combined on a forward-looking basis.

We've taken what we see as normal trend. We've taken tariffs into account. We -- to be abundantly clear we do not believe tariffs to be a material earnings impact for us. We think they're going to be within our normal view of what loss cost trend could be and will be handled with normal, ordinary course rate changes and rate filings.

We had provided some level of guidance early last year that we said our combined ratio would gradually rise to a more traditional, long-term number, probably in the 93.5%, 94.5% range. We're still at a 92%. That gradual rise, it was later than we thought it might have been. It will still likely come at some point and work its way back to that more long-term trend, and that's still our expectation.

We'd still expect it would be 3 or 4 quarters, we were just wrong about when it started. So that's good news. We'll expect that general drift and will price accordingly to all loss cost trends wherever they are and whatever the tariff impact is. But again, to be really clear because a lot of folks have been nervous about this, given all of the attributes of our book and our starting points, we just don't see the tariffs to be a material earnings impact.

I mean when you take the nature of 6-month policies, the ability to reprice the timeliness of that, we're very confident in our ability to navigate the economic environment and have a highly durable growth number.

Your next question is from the line of Paul Newsome from Piper Sandler.

I was wondering if you had any thoughts on the potential for sort of secondary impacts from the home insurance crisis in California. I think -- my sense is a lot of the big boys in that market are kind of on hold, waiting for whatever happens with State Farm and regulators to happen. And -- but I was wondering if auto could end up sort of being shifted around from a competitive perspective because whatever's happening with the home business, I think most of those are packaged riders anyway. But anyway, I just thought your thoughts on that would be, I think, interesting.

It's an insightful question, Paul. And our guess is we're already seeing that. You -- Matt, I think, described that there was a reduction in supply. There were fewer carriers engaged in the market that might be normal in that.

It wouldn't shock me if multiline players were thinking about their total offering as a total. And where if they were troubled about homeowners, they might be tightening their underwriting across the board, which is creating a more attractive environment for auto-only writers or players that are specialists there. I think we're benefiting from that right now. I wouldn't imagine that lasts for a decade, but it should last for a while, and we're capitalizing on that benefit.

Interesting. My second question on investment income, the alternatives have moved around a little bit. It's not a huge number for you guys, but that has moved around a little bit. Given what's going on with the financial market, should we be a little bit more conservative or potentially more conservative in the next quarter, given the volatility of the market recently?

I think some of that stuff is reported on a lag, if I'm not incorrect.

No, you're correct. It -- Paul, this is Brad. It is reported on a lag. When you mean conservative, are you talking about your estimates or are you talking about...

Yes. Just lower expectation for return in the next quarter or so because of the financial markets being potentially a negative number. I think that's happened with your alternative investments when the market hasn't been favorable.

The -- how I would think about it is we're still, as I indicated a couple of quarters ago, looking at $105 million per quarter run rate. Obviously, we missed by $3 million or $4 million based upon the alternative investment performance, which for many, you're seeing lower returns across the board in that asset class. Overall, though, as we generate more cash flow, we're growing and have more invested assets, you'll see it come up. And we anticipate reallocating some of our high-quality investment portfolio to higher-yielding assets, think about high-quality, high-yield private credit CLOs.

So I'd expect kind of a rolling couple quarter average of $105 million, and then for that to increase throughout the back half of the year.

Your next question is from the line of Brian Meredith from UBS Securities.

Joe, I'm just curious, what was the benefit in the quarter? Maybe talk about a little bit going forward of the increase in the California minimum limits on written premium growth.

Yes, written premium, the California minimum was -- I'm trying to remember, Matt was -- overall, on the book was 6 or 7 points, high single digits. So the 24% written premium growth definitely is benefiting from that. And you'll see that modestly come down. I wouldn't necessarily run rate the 24% written premium growth.

You probably want to think about that in the high teens on a go-forward basis.

Would you still see it in the second quarter though since it's 6-month policies?

Yes. You'd see part of it there, yes.

Got you. Okay. That's helpful. And then second question, more big picture here.

You've got ample liquidity at your holding company, debt-to-cap ratios come down. You're in great financial position right now. What are your thoughts now with respect to M&A? And is there any kind of opportunities out there given somewhat dissettled environment of sorts for a lot of small and mid-sized companies that you compete with?

Yes. Great question. First, I'll start with the statement that we never comment on M&A because if we're not doing anything and we comment on it and then we are doing something and say no comment, it says something. So we never particularly -- so nothing here should be taken as a specific commentary.

I'll point you back to our capital priorities. We described those as first and foremost, looking to organically, profitably grow our business, and our business is growing fairly significantly now and is profitable. So the first priority there, capital deployment is that. The second is if there is an inorganic opportunity to expand the strength of our franchise, we will explore and look for that if it makes us better.

Bigger isn't necessarily better. Better is better. And if there's an opportunity, we will explore that. And then third, if we can do either one of those and grow the franchise, we'll look to return capital to shareholders in an efficient and effective way possible.

So that's the reminder of the priorities. I would say we're a strong organization, and we do believe we're back on the balls of our feet and are playing offense. And like an environment that might have other folks a little disrupted when we're approaching it from a position of strength.

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

Really good color on California. Was interested in your competitor, GEICO. Their expense ratio was pretty much the same low level that it was a year ago in the first quarter. And not necessarily specific to GEICO, but outside of California, to what degree would you say the competition is back in the game and fully competing as if it were 2018 or 2019?

We're seeing generally nonstandard companies enter back into a market at a pretty good clip, ex California. We see -- well, in the non-California marketplaces, we'll see, on a normal quote, anywhere upwards of 10 to 15 competitors returning prices. That's a near-normal level for us. So ex California, fairly competitive, fairly back to business as usual there.

California, as I mentioned, is a bit of a different story where we're seeing limited supply. And keep in mind, nonstandard market is a bit different than standard market in terms of how the markets soften and so forth and -- from a pricing perspective. But generally, ex California, we are seeing the market back to a normal level of competitiveness.

Got it. And then just a couple of quick one-offs, color on frequency and severity. To what degree are you seeing frequency this year? Is it still a little low versus prior year? And how about severity?

Andrew, this is Brad. Overall, the book from a frequency and severity standpoint is performing fairly well. You see a little bit better frequency this quarter than last and on a year-over-year basis. And then severity is trending with where we're expecting it to be.

I think previously, I commented mid- to high single digits on a year-over-year basis. You get different coverages up higher than others, but in total, we're priced for mid-, high single digits, and that's kind of what we're seeing at this point. Now I'd also comment there that, that includes the FR limit change in California, and everything is basically moving as expected.

And then just two really quick ones, Brad. How much rate is still there to earn in this year? And then secondly, with regard to the other states outside of the big 3, you're up a really robust 13% on PIF. Any standout states that you're getting excited about?

Andrew, from a rate perspective, it's not something I would focus on. I would focus on more of just the PIF growth. We'll take rate up and down as needed and as indications dictate. Our goal is to remain competitive in all the markets that we operate in.

So we're not in that environment where we're trying to get back to earn rate in excess of loss cost. We're already there. So we've kind of moved beyond displaying that and discussing it. With respect to other markets, we're focused on, obviously, maintaining our competitive position in California, growing in Florida and Texas and then other expansion states like Illinois, Arizona, Colorado, Oregon, are other areas that we're focused on growing.

The bulk of our business is in those 3 main states, California and Florida, Texas. And over time, we'll grow those non-large states.

There are no further questions at this time. I'd like to turn the call over to Mr. Joe Lacher for closing comments. Sir, please go ahead.

Thank you, operator, and thanks, everybody, for your time and attention today. Again, we're pleased with the results that we've got and looking forward to continuing to deliver strong results going forward and capitalize on what we think is a very opportunistic market and opportunity throughout the year. Thanks.

This concludes today's conference call. Thank you very much for your participation. You may now disconnect.