Q3 2025 Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to Kemper's Third Quarter 2025 Earnings Conference Call. My name is Constantine, and I will be your conference coordinator for today. [Operator Instructions] As a reminder, this conference 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.

Good afternoon, everyone, and welcome to Kemper's discussion of our Third Quarter 2025 results. This afternoon, you'll hear from Tom Evans, Kemper's Interim CEO; Brad Camden, Kemper's Executive Vice President and Chief Financial Officer; Matt Hunton, Kemper's Executive Vice President and President of Kemper Auto; and Chris Flint, Kemper's Executive Vice President and President of Kemper Life. We'll make a few opening remarks to provide context around our third quarter results, followed by a Q&A session. During the interactive portion of the call, our presenters will be joined by 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. 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 third 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'll now turn the call over to Tom.

Thank you, Michael, and good afternoon, everyone. First, I'd like to begin by introducing myself. I'm Tom Evans, and as many of you know, 3 weeks ago, the Board of Directors asked me to step in as Kemper's Interim CEO. Over the past 33 years, I've had the privilege of serving in a variety of roles at Kemper, most recently as General Counsel.

During this time, I gained a deep understanding of our business and just as importantly, our people. I believe strongly in this organization, its purpose, its potential and the exceptional talent of our team. We are united by a commitment to serving markets that are often overlooked by other carriers, and I'm proud to be part of a company that embraces that responsibility with integrity and focus. As you know, our Board has commenced a search to identify our next CEO, and I'm confident they'll find the right person to lead us through the next chapter of our story.

We'll provide an update on the search when we have more information to share. Let's begin the substantive portion of this call with a straightforward comment. Our results this quarter were disappointing. Today, we'll address what happened, why it happened and above all, what we're doing about it.

Without question, we continue to believe strongly in both our strategy and our opportunities, but it's clear our execution has fallen short at times. Some of the challenges we faced were driven by external conditions, but others were within our control. We know that we need to be better operators to deliver the consistent results that investors expect and that we know we're capable of. To that end, the Board and leadership team have taken significant steps, including recent changes in leadership and a restructuring initiative to improve execution and accountability and ensure that we deliver on our strategic priorities.

This isn't about changing our direction. It's about reinforcing the disciplines that drive performance. If we do those things, we can better leverage our scale and our capabilities to improve efficiency, broaden our reach across markets and deliver more stable, sustainable results. With that, I'll now provide some context around the key drivers of our performance, and then Brad and Matt will provide more detail and commentary on each.

We'll also get a quick update from Chris, who leads Kemper Life about what's going on in that business. I'd like to start by discussing the broader specialty auto environment, which in 2025 has rapidly evolved. Historically, it's always been a more sensitive fast-moving segment with shifts often appearing there before becoming visible in the broader auto insurance space. And that dynamic certainly held true this year.

One of the most notable developments here has been the sharp increase in competition, particularly over the spring and summer. In several of our key markets, we've seen other carriers aggressively pursue market share through pricing tactics. While we're responding to these pressures, we won't abandon our underwriting standards, and we remain committed to disciplined underwriting and driving profitable growth. In addition to competitive pressure, we're seeing elevated severity trends due to medical cost inflation and higher attorney involvement in claims.

The impact of bodily injury severity has been especially pronounced in our largest market, California, where the January 1 changes to minimum financial responsibility limits are showing up in our results more significantly than initially anticipated. We had expected adjustments to be needed once real claims experience began to emerge, and we're actively making those adjustments. Matt will provide further detail later. As for the litigation environment, whether you call it social inflation or legal system abuse, the effect is the same, upward pressure on loss costs and overall claims inflation.

Ultimately, this leads to increased customer premiums and prolonged claims resolution processes. As I stated earlier, we believe in our strategy, and we remain committed to it. We know what we have to do. We're taking actions to enhance our competitive advantages, improve profitability and achieve consistent PIF growth.

We're in a solid financial position and are confident these actions will help us succeed. With that, I'll turn it over to Brad.

Thank you, Tom, and good afternoon, everyone. Before diving into the presentation, as Tom mentioned, our financial results this quarter fell short of expectations due to a combination of factors, including intensified competition, elevated severity trends in claims and a handful of infrequent items. In response, we're implementing a targeted restructuring initiative taking segmented pricing actions and making operational improvements. Additionally, we made some changes in our senior management team, including new leadership in claims and information technology, which were designed to accelerate and enable these efforts.

Our immediate priority is to enhance execution, improve profitability and position the company for growth. Let's now turn to Slide 5 to discuss our financial results in more detail. For the quarter, we reported a net loss of $21 million or $0.34 per diluted share and adjusted consolidated net operating income was $20.4 million or $0.33 per diluted share. These results generated a negative 3% return on equity and year-over-year book value per share growth of 4.8%.

Our trailing 12-month operating cash flow remained strong at $585 million, holding near our all-time high. In our P&C segment, the underlying combined ratio increased 6 percentage points sequentially to 99.6%, reflecting elevated California bodily injury claims severity and competitive pricing pressure. Policies in force and earned premium grew 0.6% and 10.7% year-over-year, respectively. Matt will discuss this in detail later.

Our Life business delivered solid results this quarter, supported by favorable mortality trends and disciplined expense management. These fundamentals continue to reinforce the segment's reliability and stable contribution to overall earnings and cash flow. Chris will briefly discuss this later in the call. Additionally, our balance sheet is strong with substantial capital and liquidity positions, providing financial flexibility.

This strength enables us to support organic growth, invest in strategic initiatives and distribute capital to shareholders. From the beginning of July to the end of October, we repurchased a total of 5.1 million shares at an average price of $52.65 for a total cost of $266 million. This activity includes the $150 million accelerated share repurchase program announced in August, which was successfully completed in mid-October. Moving to Slide 6. Here, we take a look at the key sources of earnings volatility during the quarter.

These include a restructuring charge, the write-off of internally developed software and adverse prior year development. I'll provide some additional color on each. During September, we initiated actions to drive operational efficiencies and reduce costs. These initial actions are expected to generate approximately $30 million in annualized run rate savings.

We continue to look across the business to identify additional expense savings opportunities focused on enhancing cost discipline and organizational effectiveness. These savings are intended to do two things: first, improve our combined ratio; and second, to support growth in specialty personal auto business and accelerate geographic diversification. As a result of these actions, we recorded a $16.2 million after-tax restructuring charge in the quarter. In Kemper's Preferred business, which is reported below the line in noncore operations, we lost $21 million, primarily due to a $22 million expense related to the write-off of internally developed software.

Approximately 90% of this business has now run off. As a result, an expense was recognized this quarter and all remaining software amortization has been completed. And finally, we strengthened our reserves by $51 million pretax or $41 million after tax in our Specialty Auto segment. The vast majority of the adverse development was concentrated in our commercial auto business, primarily from bodily injury and defense costs related to accident years 2023 and prior.

As Tom noted and consistent with broader industry trends, we continue to see elevated bodily injury severity. This is caused by several factors, including rising medical care costs, increased use of innovative treatments and higher attorney involvement rates. In response, we've taken proactive steps to address these challenges, including rate and non-rate actions and further enhancements to our claim management processes. Turning to Slide 7. Our balance sheet remains strong and provides financial flexibility.

As of quarter end, we maintained over $1 billion in available liquidity and our insurance subsidiaries remain well capitalized. Our debt-to-capital ratio stands at 24.2%, near our long-term target and reflective of our disciplined capital management. Notably, we generated $585 million in operating cash flow over the past 12 months, remaining near an all-time high for the company, underscoring the resilience of our business model and the consistency of our cash flow generation. Moving to Slide 8. Quarterly net investment income totaled $105 million, up $9 million sequentially, driven by improved performance in our alternative investment portfolio.

We maintain a high-quality, well-diversified investment portfolio that demonstrates thoughtful asset allocation and prudent risk management. As the portfolio grows and benefits from favorable new money rates, we anticipate net investment income will continue to trend upward over time, contributing meaningfully to overall earnings. In summary, our disciplined approach to capital deployment, strong balance sheet and resilient cash flow generation position us for success. With [ initiatives ] underway to improve profitable growth and operational discipline, we're well equipped to navigate evolving market conditions and deliver value to our stakeholders.

I'll now turn it over to Matt to discuss the Specialty P&C segment

Thank you, Brad, and good afternoon, everyone. Turning to Slide 9. The Specialty P&C segment produced an underlying combined ratio of 99.9% this quarter. Personal auto combined ratio increased to 102.1%, while commercial remained relatively stable at 91.1%. The increase in our personal auto underlying combined ratio was driven primarily by bodily injury loss trends.

We're observing signs of elevation across all geographies, this was particularly evident in California. As you will recall, on January 1 of this year, the industry-wide mandatory increase in state minimum limits went into effect. This change doubled the BI limit from 15,000, 30,000 to 30,000, 60,000, while also increasing physical damage from 5,000 to 15,000. At the time of our initial rate filings for the new limits, our pricing analysis was based on our California loss experience, complemented by our experience with similar limit increases in non-California markets. Our selected pricing factors were on the higher end of the actuarially supported range.

With that said, our early read of actual post-change severity has come in higher than forecasted. BI is a long-tail coverage and at 3 months evaluation is only about 35% developed. Also, more severe higher cost claims, which have a greater propensity to reach policy limits tend to be resolved sooner. Therefore, we move quickly to take rate and non-rate actions to ensure pricing meets lifetime targets.

We'll continue to closely monitor severity patterns and adjust accordingly. As earlier noted, the specialty auto market tends to experience emerging patterns earlier than the standard market. With specialty auto customers being higher frequency, loss patterns become visible more rapidly. To that end, an increasingly clear driver of liability cost challenge is higher attorney involvement in legal system abuse.

We continue to see attorneys attach to claim files much earlier in the process. The combination of growing medical inflation and the greater use of elective procedures is driving a more expensive treatment mix. This dynamic is not unique to our business. It's an industry-wide trend that will require more proactive and disciplined management.

With that said, 95% of our book is at state minimum limits, which places an upper bound on further cost escalation. As Brad discussed, in addition to our underwriting and pricing actions, we've launched a restructuring initiative aimed at creating a more competitive cost structure to further diversify our book. These efficiencies are supporting expansion efforts in Florida, Texas and other noncore states, funding market entry work, improving product competitiveness and expanding distribution partnerships in priority regions where we see strong growth potential. Shifting to production.

California moved quickly from a hard market to a more normalized market with competition intensifying. We're taking rate and non-rate actions to address liability costs to ensure pricing economics remain sound. These actions are aligned with our goal of driving profitable growth through the cycle. Our pricing actions to date in Florida and Texas have helped stabilize our in-force book.

Ongoing expense, efficiency initiatives and enhancements to our product capabilities are targeted at supporting profitable growth in these markets. In commercial auto, underlying margins remained strong and PIP growth was 14%. The competitive market remains stable with regional nuances. Similar to our personal auto business, we continue to be aggressive on rate actions across all coverages with heightened focus on bodily injury.

Our competitive advantages position us well to capitalize on these opportunities. And finally, we're focused on execution, rolling out new product features, improving end-to-end claim handling and driving cost efficiencies, all to enhance price competitiveness. By strengthening operational discipline in these areas, we can grow strategically, diversify our footprint beyond core markets and deliver profitable growth. I'll now turn the call over to Chris to cover the Life business.

Thank you, Matt. Turning to our Life business on Slide 10. The Life segment delivered solid quarterly results with operating earnings of $19 million, driven by favorable claims experience and expense levels tightly aligned with product economics. Despite a modest decline in premium volume, the business remains well positioned to sustain strong returns on capital and robust cash generation. I'll now turn the call back to Tom to cover closing comments.

Thanks, Chris. In closing, I hope we've described not only what happened this quarter and why, but more importantly, the actions we're taking to improve profitability and growth. We're reinforcing the disciplines that drive performance through management changes, a restructuring initiative and a renewed focus on execution. As I said at the top, I have tremendous confidence in this organization, its purpose, its potential and the talent of our people.

I want to thank our entire team for their commitment and hard work to make Kemper a stronger organization. As we navigate this environment, we remain certain of our ability to deliver long-term value to all of our stakeholders. Operator, we may now take questions.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from the line of Andrew Kligerman from TD Cowen.

Maybe start with the commercial auto segment. I calculate an unfavorable prior year development of 18.7 points. And that follows the second quarter at 8.4 points of unfavorable. And if I -- and correct me if I'm wrong, but if I recall the management commentary on the last call, like it seemed that it had been nipped like they had really captured it.

We talked on the call, I think, about the social inflation environment. So what's happened between 2Q and 3Q on the commercial end? And why should we not expect another unfavorable prior year development there?

Andrew, this is Brad. Thank you for the question. You are correct in comments from prior quarter. We did have adverse development in the second quarter.

And obviously, we've also had adverse development here in the third quarter. In the second quarter, we discussed the adverse development being latent large loss activity, not due to frequency, but higher severity. We've experienced the same thing here in the third quarter on large losses, so continued latent development in accident years 2023 and prior. Additionally, we're also seeing BI severity trends from social inflation and continued attorney attachments in accident and nonlarge losses, which is how we describe it as anything below $250,000. So the BI severity trends that Matt discussed in the call previously, not only in PPA is also prevalent in commercial vehicle, and it has been prevalent across the industry to date.

With respect to us capturing this and not being a consistent issue, we've adjusted our expectations on what each of those cases are today and what they're going to expect to develop to. And we've also adjusted our IBNR development factors to capture what we think is probable in the future. We're confident in that. But as the environment remains extremely dynamic, there may be further adverse development, but we're confident with what we have today.

Okay. And my follow-up question, shifting back to private passenger auto come in at an underlying combined of 102.1%. And a lot of your competitors we've seen are coming in around 90%. So I guess you've got geographic differences.

So I guess the question is, one, what gives you confidence in your data and analytics? Are you up to speed with that? Are you in line with your peers with your data and analytics in terms of capturing this stuff? And I suspect the part B of it is, I suspect you probably need some rate and California has historically been a very tough state.

Do you think they'll give the approvals that you need?

Andrew, this is Matt. I'll start with just highlighting the nuance difference between us and some of the Main Street competitors that we're up against. I think primarily one is we're predominantly a minimum limit customer base. We have a different frequency profile and loss profile.

It sort of the definition of nonstandard. The other is 60-plus percent of our book is in California. And that's really where the driver of the inflection was in the loss from quarter-over-quarter. Frequency came in line within expectations.

It was slightly elevated, but within normal sort of seasonal expectations. The driver was heightened severity, and it was really the BIP dynamic, that's really -- it's not new for the industry. This has been a dynamic in the industry for the last decade or so, but it was heightened due to the FR changes in California earlier this year, right? And so this effectively acts as a onetime step-up in cost.

And this isn't normal. The last time California had a limit increase was in 1967. And so with California representing the percentage of the portfolio for us that it does, naturally, it's more pronounced in our results relative to peers. And as our California book converted over to the new limits, and as Brad mentioned, with the latent development or the slow development of BI coverage, we observed the elevated paid patterns in the mid part of the third quarter, and we took immediate action. I don't think we have any concern about our analytics or insights.

We have a prospective view in terms of where costs are going, and we're trying to be as aggressive as we can in achieving that. Regarding the rate to be filed -- that is currently filed with the CDI, that is with the CDI, we are having proactive conversations with them. Our goal is to get the rate effective as soon as possible, and the dialogues are moving along as we expect them to.

Got it. And maybe just if I could sneak one last one in. There was a lot of discussion in the investment community about Kemper's willingness to be acquired. I know you can't be specific, but what's your thinking right now on that topic? Is that something that Kemper is open to?

Andrew, this is Tom Evans. That's not really something we can comment on. We're a public company. We're for sale every day.

The next question comes from the line of Mitch Rubin from Raymond James.

I wanted to ask about the restructuring. Could you please elaborate on some of the specific areas where you guys are targeting cost savings from, thanks.

Thanks, Mitch. This is Brad. Really in 3 areas. One is an organizational design.

We've restructured some of the reporting lines and as a result, have had some cost savings. So organizational structure. Second bucket is process efficiencies. So think about with some new product launches, we have lower commissions with improved process, we expect to reduce some print postage, some bad debt, other things.

So increased overall efficiency in the organization is key and critical. And lastly, our various one-off things that maybe we've made investments in, in the organization that we're looking to change how we do business and how we operate going forward. So in total, as we mentioned, we took a $16.2 million after-tax charge. That's going to save us on a run rate basis, approximately $30 million annually.

And my follow-up on Page 9 of the presentation, I see that policies in force in Florida and Texas came down about 7% year-over-year. Could you provide some color on what you're seeing in the competitive environment there?

Yes. This is Matt again. Look, I'll start with overall, we still are bullish on the markets that we operate in. Obviously, California being our largest.

We talked a lot about California being a hard market over the past few quarters as it worked its way through the pandemic. That is normalizing. Competition is increasing on the new business side. With that said, our policy retentions are stable there, but some competitors continue to get increasingly aggressive.

And as we are making the changes we're making on the pricing and underwriting side to address the liability trends, we think those are the right changes, and we're remaining disciplined as we work through the cycle. In terms of Florida and Texas, those markets are very competitive marketplaces. I think we've talked about that for the last few quarters. We've done quite a few changes in our products from a segmentation pricing perspective that have stabilized our in-force book of business.

And as Brad mentioned in the prepared comments, the restructuring and cost efficiencies that we're driving through the business, along with additional product enhancements are focused on those markets, so to accelerate growth in those markets and help us move towards our strategic end state of being a more diversified geographic portfolio.

Great. That's helpful. If I could just ask one more thing. You mentioned some nonrate actions you guys have been taking. Could you give any insight towards that? .

Yes, non-rate actions are effectively tightening some underwriting aperture managing agents in terms of capacity with a bit more aggressiveness, adjusting billing features, among other things that help us manage profile and the expected losses associated with the profile.

[Operator Instructions] The next question comes from the line of Brian Meredith from UBS.

A couple of questions here for you. The first one, I think it's related to some runoff stuff, but I'm just curious, the software write-off in the quarter, what is that exactly related to? And does that have any effect or a part of your, call it, specialty business?

Brian, this is Brad. The write-off of the internally developed software is solely related to the Kemper Preferred business, which is reported below the line in noncore operations. As a result of our premium forecast and the acceleration of the runoff of that business, we determined that the premium receiving is no longer enough to support those assets. So as a result, we've written them off this quarter.

It has no relation to the specialty auto business. It's solely related to Kemper Preferred. I'd also like to highlight that, that business is now 90% runoff and the remaining policy is predominantly in the state of New York, which we are close to working with the regulator to accelerate the runoff of that business.

Makes sense. And then my next question is, I mean, I guess the Chief Claims Officer and the Chief Information Officer, CIO, are gone. What changes are you making with -- in the claims in the information technology area as a result of the departures?

Well, we publicly -- Brian, this is Tom Evans. We've announced that Andy Ramamoorthy stepped in as Chief Claims Officer. So that response to that part of your question. With regard to the IT space, we currently have an office of the CIO that's comprised of 3 members of our executive team, Andy, who already mentioned, Matt and Brad are the other 2 members. And we are -- I'm sorry, go ahead.

Yes, I meant more about process right underlying process or changes that maybe the changes within claims or systems processes, not so much the new people coming in.

Brian, this is Matt. We -- on the claims side, there are a few sort of process points of evolution that we're working on. And some of this has been work in process for the last few years. But the biggest one is sort of having an end-to-end orientation around how we manage total cost of ownership and value generation.

We worked pretty aggressively on the material damage side the last couple of years, and the efforts are paying off in terms of stemming some of the tariff pressures that I think the industry is seeing. We have been working that on the liability side, and we're accelerating some of that work so we could aggressively manage some of the headwinds from a liability trend perspective. That's one example. Another example is we're taking our data science capabilities that we built on the pricing front, and we're accelerating that into claim to help us process more effectively sort of next best action, drive some automation, leveraging AI and other toolkits to really drive efficiency in the engine.

And on the technology side, similarly, connecting that more to the business to drive value in a more expeditious and agile way.

Sorry, Brian, I just going to add one more comment is the other thing that we've done is we've repositioned some of the players in our claims team, particularly to respond to some of the more active things we're seeing in the litigation environment to better respond to those issues.

Makes sense. And then last question, I guess, more from Brad. So I'm assuming there was some kind of current year catch-up in the underlying kind of loss picks in the quarter. What's the run rate underlying loss ratio right now in the third quarter ex kind of current year development? And maybe you could break that down between personal auto and the commercial.

Great question, Brian. Well, I'll give you the details. Essentially, underlying loss ratio from Q2 to Q3 increased 6 percentage points, 93.6% to 99.6%. When you think about the current year adjustments, no significant current year adjustments.

What we're seeing is favorable development on comp and collision and the metals coverages, and we continue to see some adverse development even in the current accident year on BI. So it's a mix development, but no significant changes either in commercial vehicle or PPA.

Your last question is from the line of Andrew Kligerman from TD Cowen.

On the share repurchases, you did a pretty active -- I think it was what, $266 million through October from July 1, and you still have about $300 million left. So maybe some color on your thoughts around share repurchase going forward.

Thanks, Andrew. You are correct with the numbers, 5.1 million shares, roughly $266 million. From a share repurchase standpoint, we continue to think the stock is attractive. That said, I will point you to our capital deployment strategy, which is first to fund organic growth.

Matt talked about what we're doing there as we invest some of the restructuring savings into Florida and Texas. So we want to make sure we have enough for internal organic growth. Secondly, we want to make sure we have enough capital to have financial flexibility. And then third, if there's anything that's additional, we will distribute that to shareholders.

So you are correct. There's still a significant amount remaining in the authorization that was granted last quarter, that $500 million, and we'll continue to be tactical with that as we go forward.

And maybe just as a quick follow-on to that. In terms of policy in-force growth, and you've talked about it, Brad, that PIF would be a little lighter, maybe very low single digit in the back half of 2025. Are you thinking just in light of all these pricing changes that you can kind of maintain that? You came in close at 0.6. And then when you get into 2026, do you feel like you could really target that -- what was it like mid-single-digit growth that you were looking for in PIF next year, maybe upper mid?

Yes. So you got the numbers correct, Andrew. We came in at 0.6% year-over-year, down sequentially. I'll highlight that we talked about this a lot in the past is going from Q3 to Q4, we typically see lower shopping activity as a result, PIF naturally declines just as a result of seasonality in our business.

So I would expect PIF to modestly decline maybe 1% or 2%, maybe 3% from Q3 to Q4. Then I'd expect us back to growing in the first quarter as we get into the buying season. And as a reminder, that buying season typically starts mid-February and goes through late April, early May. As far as PIF growth, what we expect in the first half of next year, I think that depends on the competitive environment. As Matt mentioned, our goal is to grow profitably.

And so we're going to protect our margins and be thoughtful around growth, particularly in some key states like California.

There are no further questions at this time. I'll hand the call over back to Tom Evans for closing comments. Sir, please go ahead.

Thank you. I want to thank everybody for taking the time to join us today and to provide the thoughtful questions. We appreciate everyone's continued support as we move through this transition and we look forward to speaking with you again next quarter. In the meantime, the team here at Kemper remains focused on execution and continuing to focus on delivering value for our shareholders.

Thanks very much. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.