Kemper Q4 2024 Earnings Report

Kemper EPS Results

• Actual EPS: $1.78
• Consensus EPS: $1.38
• Beat/Miss: Beat by +$0.40
• One Year Ago EPS: N/A

Kemper Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $1.16 billion
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Kemper Announcement Details

• Quarter: Q4 2024
• Date: 2/5/2025
• Time: After Market Closes
• Conference Call Date: Wednesday, February 5, 2025
• Conference Call Time: 5:00PM ET

Kemper (NYSE:KMPR), a diversified insurance holding company, engages in the provision of insurance products to individuals and businesses in the United States. The company operates through three segments: Specialty Property & Casualty Insurance, Preferred Property & Casualty Insurance, and Life & Health Insurance. It provides preferred and specialty automobile, homeowners, renters, fire, umbrella, general liability, and various other property and casualty insurance to individuals, as well as commercial automobile insurance to businesses. The company also offers life insurance, including permanent and term insurance; and supplemental accident and health insurance products, such as Medicare supplement insurance, fixed hospital indemnity, home health care, specified disease, and accident-only plans to individuals in rural, suburban, and urban areas. It distributes its products through independent agents and brokers. The company was formerly known as Unitrin, Inc. and changed its name to Kemper Corporation in August 2011. Kemper Corporation was incorporated in 1990 and is headquartered in Chicago, Illinois.

Kemper Q4 2024 Earnings Call Transcript

Presentation

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Kemper's Fourth Quarter twenty twenty four Earnings Conference Call. My name is Constantine, and I will be your coordinator for today. At this time, all participants are in listen only mode. 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 Marinciano, Kemper's Vice President of Corporate Development and Investor Relations.

[Operator]

Mr. Marinciano Nacho, you may now begin.

[Michael Marinaccio, Vice President of Corporate Development at Kemper]

Thank you, operator. Good afternoon, everyone, and welcome to Kemper's discussion of our fourth quarter twenty twenty four results. This afternoon, you'll hear from Joe Locker, Kemper's President and Chief Executive Officer Brad Camden, Kemper's Executive Vice President and Chief Financial Officer and Matt Hunt, Kemper's Executive Vice President and President of Kemper Auto. We'll make a few opening remarks to provide context around our fourth quarter results followed by a Q and 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 and C and John Bichelli, Kemper's Executive Vice President and Chief Investment Officer.

[Michael Marinaccio, Vice President of Corporate Development at Kemper]

After the markets closed today, we issued our earnings release and published our earnings presentation and financial supplement. We intend to file our Form 10 ks with the SEC in the coming days. You can find these documents in the Investors section of our website kemper.com. Our discussions 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.

[Michael Marinaccio, Vice President of Corporate Development at Kemper]

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 Form 10 K and our fourth 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 the non GAAP financial measures to GAAP, but required in accordance with SEC rules. You can find each of these documents in the Investors section of our website kemper.com.

[Michael Marinaccio, Vice President of Corporate Development at Kemper]

All comparative references will be to the corresponding 2023 period unless otherwise stated. I will now turn the call over to Joe.

[Joseph Lacher, President & CEO at Kemper]

Thank you, Michael. Good afternoon, everyone, and thank you for joining us today. I'm pleased to report that we delivered very strong results for the year and even stronger results for the fourth quarter. We're excited to dig into these in more detail. But before we do that, I'd like to make a few broader marketplace comments.

[Joseph Lacher, President & CEO at Kemper]

We've been experiencing a hard market due to the massive COVID related inflation spike, which led to a meaningful imbalance between premiums charged and underlying loss trend. Against that backdrop, carriers with competitive advantages and quick responsiveness would be able to rebalance rate and loss trends sooner and realize two things: first, better than normal underwriting profitability and combined ratios and second, growth rates exceeding long term averages. You don't have to look further than Progressive to see this play out over numerous market cycles in the broader standard and preferred auto market. Given our strong competitive advantages and responsiveness, we rebound sooner than most of our specialty auto competitors. Because of this, we are capitalizing on the benefits and achieving strong profitability and growth in this business.

[Joseph Lacher, President & CEO at Kemper]

Clearly, there's some texture when you break this down by geography. Florida and Texas have displayed a more economically balanced regulatory environment and their markets are moving towards longer term norms more rapidly. California is different. Between its unique regulatory approach, the doubling of auto minimum policy limits that began January 1 and the associated premium increases and the second derivative impacts of wildfires, we expect a hard market to remain there for some time. To be clear, we believe we are priced appropriately in California.

[Joseph Lacher, President & CEO at Kemper]

Our competitive advantages position us very well to continue to meet the needs of an underserved market, grow the business, and deliver strong financial results. Overall, we expect the financial benefits from our competitive advantages in this hard market to continue. And before we turn to our results in more detail, I'd like to take a moment to comment on the recent California wildfires. Kemper is deeply connected to the broader communities impacted. It's where many of our customers, employees, and agents live and work.

[Joseph Lacher, President & CEO at Kemper]

Our thoughts and support are with all those impacted, and we wish for everyone's safety and resilience throughout the recovery process. That said, relative to our results, these events are not expected to have a meaningful impact on our financials. Now let's move to page four and jump into some specifics on our results. As I said earlier, we delivered a strong year and an even stronger quarter. For the year, we delivered net income of $318,000,000 and for the quarter, it was $97,000,000 Our core businesses are performing very well.

[Joseph Lacher, President & CEO at Kemper]

This is led by our specialty auto business where our underlying combined ratio was a very strong 91.5% for both the year and the fourth quarter. Matt will dive into this in more detail later, but I want to note that we're very pleased with our PIF growth. Historically, we have seen seasonally low shopping behavior in the fourth quarter. This has usually resulted in sequential quarter PIF decline of around 2%. However, this time we delivered 2% growth.

[Joseph Lacher, President & CEO at Kemper]

This continues the pattern of attractive growth we've seen since early twenty twenty four. On a year over year basis, PIF grew over 5%. We expect robust growth trends to continue as we enter the 2025 specialty auto buying season. For our Life segment, the underlying business fundamentals remain stable and the business continued to produce strong return on capital and distributable cash flows. Overall, for the year, we generated a strong return on equity of 12% and return on adjusted equity of just over 18%.

[Joseph Lacher, President & CEO at Kemper]

We have continued to strengthen our balance sheet. We repurchased additional shares during the quarter. We increased our quarterly dividend and we are retiring $450,000,000 of debt next week. Brad will have more on all of these later. And with that, I'll turn it over to Brad.

[Bradley Camden, Executive VP & CFO at Kemper]

Thank you, Joe. I'll begin on Page five of our consolidated financials. We generated another quarter of solid operating profit, resulting in the highest level of adjusted consolidated net operating income in over four years. Net income was $97,400,000 or $1.51 per diluted share and adjusted consolidated net operating income was $115,100,000 or $1.78 per diluted share. For the year, net income was $317,800,000 or $4.91 per diluted share and adjusted consolidated net operating income was $381,500,000 or $5.89 per diluted share.

[Bradley Camden, Executive VP & CFO at Kemper]

These earnings translate to a 14% return on equity and a 21.4% adjusted return on equity for the quarter or eleven point nine percent and eighteen point three percent respectively for the year. We expect continued strong profitability. Our performance this quarter was driven by the results of our two core businesses. Specialty Auto delivered an attractive 91.7% underlying combined ratio and generated $101,000,000 of adjusted net operating income. Given the current market environment and the strength of our specialty auto franchise, we expect continued profitable growth.

[Bradley Camden, Executive VP & CFO at Kemper]

Matt will provide further details later. Moving to life. This business delivered $24,000,000 of adjusted net operating income, an increase of $9,000,000 from last quarter. Approximately $6,000,000 of the sequential quarter increase was related to the annual LVTI assumption update. Recall, we update our actuarial assumptions in the fourth quarter each year.

[Bradley Camden, Executive VP & CFO at Kemper]

Looking forward, we anticipate annual adjusted net operating income run rate of roughly $55,000,000 or $13,000,000 to $14,000,000 per quarter. Turning to Page six. Net investment income for the quarter was $103,000,000 and in line with the guidance we provided last quarter. Our pretax annualized book yield was 4.4%. As operating earnings continue to improve, we are adjusting our asset allocation and moving further out along the risk spectrum.

[Bradley Camden, Executive VP & CFO at Kemper]

This change will occur incrementally over the next three to five quarters and will help increase net investment income to support operational growth. That said, we will continue to maintain a high quality, well diversified investment portfolio. Moving to Page seven. Our insurance companies are well capitalized and maintain significant sources of liquidity. Parent company liquidity was approximately $1,300,000,000 at the end of the quarter.

[Bradley Camden, Executive VP & CFO at Kemper]

This liquidity balance allows us to pay shareholder dividends, interest payments and support our operating subsidiaries. Our strong financial performance delivered over the past year has allowed us to return capital to shareholders while simultaneously increasing our financial flexibility. This quarter, we repurchased $14,000,000 of common stock, bringing the remaining share repurchase authorization to $133,000,000 dollars We will continue to opportunistically repurchase shares. Additionally, today, we increased our quarterly dividend by $0.01 to $0.32 quarterly or $1.28 annually. This is our first dividend increase in four years and represents the continued confidence in our ability to deliver sustained, long term profitable growth for our shareholders.

[Bradley Camden, Executive VP & CFO at Kemper]

And lastly, and as previously announced, next week we will retire $450,000,000 of debt using cash on hand. This will bring our debt to capital ratio back into the low 20s and further strengthen our balance sheet and financial flexibility. Next on Slide eight. Here, we provide an update on our 01/01/2025 reinsurance renewal. Our catastrophe excess of loss program is a one year term that covers 95% of losses in excess of $50,000,000 up to $175,000,000 This year's limit is approximately 30% lower than last year, driven by the reduction of total insured value due to the Kemper preferred exit.

[Bradley Camden, Executive VP & CFO at Kemper]

The takeaway from this is that our business is less prone to catastrophe risk. I'll now turn the call over to Matt to discuss the Specialty P and C business.

[Matthew Hunton, Executive VP & President of Kemper Auto at Kemper]

Thank you, Brad, and good afternoon, everyone. Turning to Page nine in our Specialty P and C business. We closed 2024 with a strong fourth quarter. Margins continue to outperform long term expectations with an overall combined ratio of 91.7%. Private passenger producing 91.4% and commercial auto producing 93%.

[Matthew Hunton, Executive VP & President of Kemper Auto at Kemper]

As Joe mentioned, the current period of rapid price increases and more restrained carrier underwriting has meaningfully increased customer shopping activity. The specialty auto market has a more fragmented group of smaller competitors. With this environment and our distinct competitive advantages, we are significantly growing our book. We expect these conditions to continue for some time. The growth we achieved in the fourth quarter was outstanding.

[Matthew Hunton, Executive VP & President of Kemper Auto at Kemper]

Traditionally, PIF would have shrunk about 2% from the third to the fourth quarter, but instead we grew units by 1.7%. This growth is in line with our production over performance of the last two quarters. We have now achieved year over year PIF growth of 5%. This business tends to have seasonal shopping patterns and we have historically experienced large swings in quarterly production. Therefore, we've traditionally used year over year metrics as they adjust for the seasonality.

[Matthew Hunton, Executive VP & President of Kemper Auto at Kemper]

As we were shifting from declining PIF to growing PIF, that metric became less helpful, so we directed your focus to a quarter over quarter growth metric. As we are now reaching more consistent production levels, we will be pivoting back to a year over year view. For now, we will continue to share both views on this slide. Let's click down into some state level texture. Starting with California, our largest market, we continue to see pricing disruption driven by both the delayed rate increases in response to inflation and mandated increases in minimum limits.

[Matthew Hunton, Executive VP & President of Kemper Auto at Kemper]

This pricing volatility is driving increased consumer shopping. We are optimally positioned to capitalize on this dislocation and have a very positive outlook. In Florida, we continue to achieve profitable growth. This market is behaving more normally than California and in many ways is back to business as usual. We are well positioned there for further growth.

[Matthew Hunton, Executive VP & President of Kemper Auto at Kemper]

Our commercial business continues its success with another strong quarter. For the last six years, this business has generated an underlying combined ratio below 96 with only one of the last 24 quarters being above 100. The differentiating capabilities of this business are enabling us to expand profitably in the markets we serve. It remains a reliable source of profitable growth across market cycles. In closing, we are very pleased with our results and confident in the position of both our private passenger auto and commercial businesses.

[Matthew Hunton, Executive VP & President of Kemper Auto at Kemper]

The environmental backdrop remains favorable and we are determined to continue to capitalize on this opportunity. We remain fully committed to sustained profitable growth. I'll now turn the call over to Joe to cover the Life business and closing comments.

[Joseph Lacher, President & CEO at Kemper]

Thank you, Matt. Turning to our Life business on Page 10. As noted earlier, the underlying business continued to generate stable operating results. Mortality was modestly better than historical experience, while persistency remained in line with historical trends. The Life business continued to generate strong return on capital and distributable cash flows.

[Joseph Lacher, President & CEO at Kemper]

As Brad mentioned, the 2023 LDTI accounting change requires an annual actuarial assumption update. For Kemper, this review occurs in the fourth quarter. It updates assumptions for the entire in force book. As a result, the financial impact is not a run rate item. We've provided the income statement impact for your reference.

[Joseph Lacher, President & CEO at Kemper]

Turning to Page 11. In closing, I'd like to reiterate our highlights for the quarter and year end. First, Kemper delivered strong operating performance led by Specialty P and C's underwriting profitability. Second, Specialty P and C returned to year over year PIF growth and is well positioned for significant growth going forward. Third, the underlying fundamentals of our Life business remain stable.

[Joseph Lacher, President & CEO at Kemper]

And finally, we continue to strengthen our balance sheet. We repurchased $14,000,000 of stock in the quarter, raised our quarterly dividend and will retire $450,000,000 of debt next week. As we move through 2025, we remain well positioned to deliver on our promises of empowering growing specialty and underserved markets with affordable and easy to use insurance and financial solutions. We continue to anticipate meaningful profitable growth in our specialty auto business for the foreseeable future and are confident in our ability to create long term shareholder value. Before we wrap up, I want to take a moment to thank all of our employees for their hard work and dedication to achieve these results.

[Joseph Lacher, President & CEO at Kemper]

Their commitment has been instrumental in delivering on our promises to our customers and ultimately driving our success, and we truly appreciate everything they do to help us achieve our goals. With that, operator, we may now take questions.

[Operator]

Thank

[Operator]

Your first question comes from the line of Gregory Peters from Raymond James. Please go ahead.

[Gregory Peters, Managing Director - Equity Research at Raymond James Financial]

Good afternoon, everyone. For my first question, I'm curious about the consequences of the fire in California on other lines of business, particularly auto. And you said, Joe, I think in your opening comments, it's a hard market there. Can you give us an update on like the number of companies that are showing up in the comparative raters in your agency plant inside California? And have you seen any change in that just because of the fires?

[Joseph Lacher, President & CEO at Kemper]

Sure. I'm going to make a quick overall comment and throw it to Matt for the details. We're not at this point seeing a substantive change in any of our businesses. There may be second or third derivative impacts down there. We don't have a we're not seeing a financial impact.

[Joseph Lacher, President & CEO at Kemper]

Sales are consistent. Retentions are consistent. Nothing we can really see from the fire. Matt, you want to click in deeper on some of the questions?

[Matthew Hunton, Executive VP & President of Kemper Auto at Kemper]

Yes. Greg, just a little bit more texture in California. We talk about it being a hard market. Our definition of a hard market is you have strong pricing and fewer competitors. And what we're seeing is that price dislocation that's happening across the entire auto market is generating more shopping activity, and we see that as an opportunity for us.

[Matthew Hunton, Executive VP & President of Kemper Auto at Kemper]

We feel strong about our rate adequacy, about our pricing, and we're doing our best to take advantage of this opportunity while it exists. I think the property market and the ales that that market is working through is over time has helped in suppressing the auto supply market. That's an advantage to us. We generally see between four and six competitors per quote that's been consistent over the last year and a half or so. We're not seeing that metric move materially.

[Gregory Peters, Managing Director - Equity Research at Raymond James Financial]

Got it. And in your comments, you talked about the seasonality of production in PIF. I'm wondering, now that profitability has been restored, is there going to be a return to seasonality and sort of the underlying loss ratios? And how do you think about that as we work through a normalized year?

[Joseph Lacher, President & CEO at Kemper]

Yes. At some point, Greg, there'll be some sort of return to that. I'm not sure we're ready to forecast that yet. You're going to see through our pieces there's some piece of seasonality you're going to get a little bit of different view on where new business penalties are, you get a little bit of state by state mix on it. If it's really a modeling question, we can try to help you with that a little more offside.

[Joseph Lacher, President & CEO at Kemper]

If it's a general view, I think we maintain the process. We're running a little better than a 92 combined ratio now. Over a number of quarters, that's going to generally migrate towards a more traditional 93%, ninety four %, ninety five % range. We can't give you an exact precision on that. We described that, I think several quarters ago as 4% to 6%.

[Joseph Lacher, President & CEO at Kemper]

It's going to sort of work its way over time. The longer the market stays harder, the slower that migration will be, it'll adjust as it works. We expect some of that seasonality on loss ratios will come back. I just think for the next twelve months, it will be harder to try to go quarter to quarter projecting that loss ratio with a boatload of precision, because of the big swings in production over the last twelve months.

[Gregory Peters, Managing Director - Equity Research at Raymond James Financial]

Okay, fair enough. I guess the final just clarification, I didn't have Sherry purchase in the fourth quarter on my dance card. So there are a lot of things you've done from a capital perspective. How should we think you raised the dividend, how should we think about share repurchase in 2025 as you balance that versus the growth opportunities?

[Bradley Camden, Executive VP & CFO at Kemper]

Greg, this is Brad. Thanks for the question. I'll go back to the principles we have with respect to capital usage. The number one source of capital usage is, obviously, we want to grow PIF. We want to grow organically.

[Bradley Camden, Executive VP & CFO at Kemper]

The second is look at anything inorganic. And I'll tell you right now, we're not in that spot right now. And then third is obviously return capital to shareholders. We've done a little bit with the dividend, and we've been opportunistically buying back shares when we think the stock is undervalued. And we'll continue to do so, but don't anticipate any significant buyback program in the near term.

[Bradley Camden, Executive VP & CFO at Kemper]

And as I indicated, we've got about $133,000,000 left on the share repurchase authorization issued a couple of years ago. If I can add on to Got it. I 100 agree with them. The clear takeaway in that, we're seeing strong organic profitable growth opportunities right now and the bulk of the capital we anticipate generating from earnings we can deploy in organic growth. So we're going to that's our primary focus that's the first level focus for us.

[Bradley Camden, Executive VP & CFO at Kemper]

We have adequate capital to opportunistically buy shares and be a supporter of that in the market where it's appropriate, but the primary focus is that profitable organic growth.

[Gregory Peters, Managing Director - Equity Research at Raymond James Financial]

Got it. Makes sense. Thanks for the answers.

[Operator]

Your next question comes from the line of Brian Meredith from UBS. Please go ahead.

[Brian Meredith, Managing Director at UBS Securities LLC]

Thanks. Joe, just one quick one here to begin with. Any way to quantify the lift we'll see on that $1,800,000,000 of California auto premium from these minimum limits as we look into 2025?

[Joseph Lacher, President & CEO at Kemper]

Yes. Our minimum limit policies saw a little more than a 30% increase on it and they represent about between 5060% of our California policies. There I'm sorry, I misspoke on that one. It's a higher percentage. Our minimum limit policies in California are north of 90%, in that process.

[Joseph Lacher, President & CEO at Kemper]

I was doing a broader countrywide view. So think the majority of the California premium gets another 30%.

[Brian Meredith, Managing Director at UBS Securities LLC]

Wow. Okay. But like I think you said last quarter

[Joseph Lacher, President & CEO at Kemper]

I think that 30 numbers on the liability only, not the minimum limits.

[Brian Meredith, Managing Director at UBS Securities LLC]

Got you. Got you. And like you said last year sorry, last quarter, you don't expect to have a material impact on profitability because you're trying to kind of keep your rates where you're going to keep that kind of mid-90s combined ratios, correct?

[Joseph Lacher, President & CEO at Kemper]

I missed the last part of that, Brian. I missed the answer.

[Brian Meredith, Managing Director at UBS Securities LLC]

Last quarter, you talked about how you don't anticipate the higher minimum of this having a material impact on margins, just because of the way you're implementing rate. That's still correct, right?

[Joseph Lacher, President & CEO at Kemper]

That's still correct. What we did is we effectively took we had limit profiles that were at the old minimum limits and we had the staggered limit curve, you know, we so we gave people options. We eliminated the ones at the bottom and sort of moved them up and then we made an adjustment for what we thought a loss mix would be. So so that affected the minimum limits piece is that. Remember on it though, let's break apart the premiums a little bit.

[Joseph Lacher, President & CEO at Kemper]

You've got first party coverages and third party coverages. The minimum limits affect the liability side of this, not the first party. So, you know, if you bought full coverage it covers your car and it covers anybody you hit. The stuff that covers your car, the comp, the collision, that doesn't go up 30%. It's just the the BI and PD coverages.

[Joseph Lacher, President & CEO at Kemper]

So it's not all of the California premium, it's the premiums that would be covered, by liability. The majority of our customers for those coverages have minimum limits policies and those went up about 30%. So, you got to break it apart. It probably comes in if you want a simple way if you're trying to build a modeling item like 15, 16 percent of the total California premium, when you work it through. If you were being more precise, you could do it by line.

[Joseph Lacher, President & CEO at Kemper]

And we do not think that is going to meaningfully change margin.

[Brian Meredith, Managing Director at UBS Securities LLC]

Got you. Okay. Second question, just curious and I know we've talked about this before, but some adverse development on the commercial auto line. I know you've got a different commercial auto book than your typical kind of commercial auto book that we think about. But what's going on there?

[Brian Meredith, Managing Director at UBS Securities LLC]

Is it the same kind of attorney rep going on?

[Joseph Lacher, President & CEO at Kemper]

So two comments. I'm going to make one overall and I think Brad's going to kick in on the development. Remember, our commercial auto book is not a typical competitor view of commercial auto. I think in the last twelve, twenty quarters we've only had one quarter that had an underwriting loss. This is a business that and underlying underwriting profitability has been strong and it's been growing it it only had that one underlying period over 100.

[Joseph Lacher, President & CEO at Kemper]

We don't have trucking we don't have sand and gravel haulers we don't have you know ugly stuff it's not massive fleets it's it's it's small, it's smaller stuff, which is why it performs different. You occasionally get a couple of, you know, you'll get a large loss here or there that may pop that may be out of pattern, and that happens, you know, on a book this size. I wouldn't think too much of it. If you look at that strong rolling, rolling loss ratio or in combined ratio, it's very attractive. Brad, you want to talk about some of the underlying trends?

[Joseph Lacher, President & CEO at Kemper]

Yeah. I think just to give you a view of our overall reserving philosophy, if you take a step back up, when you look at KA in total, we had adverse development about 1,900,000. And so our first philosophy is make sure from a KA or specialty auto perspective, we have more than enough reserves to pay for the what we owe. And then at the end of the year, we looked at the development coming through. We decided to bolster the CV side and there's some favorability on the PPA side.

[Joseph Lacher, President & CEO at Kemper]

Where we were bolstering mainly was a result of the extracurricular, obligations, ECOs, extra contractual obligations, the ECO stuff, where we're seeing a little bit higher development. So it's just really end of the year cleanup. No significant change in trends or anything that we're seeing.

[Brian Meredith, Managing Director at UBS Securities LLC]

Great. Thank you. Appreciate it.

[Operator]

Your next question comes from the line of Andrew Kligerman from TD Securities. Your line is now open.

[Andrew Kligerman, Managing Director at TD Securities]

Hey, thanks a lot. Good evening. So I'm looking at Slide nine in the top right hand corner at the PIF growth Q over Q. And when I think about 5% year over year and for the first three quarters of last year, you saw year over year drops. So it sounds like, and correct me if I'm wrong, the comps just get easier and easier, especially if the three areas where you have those three kind of rows, California, Florida, Texas and then other, if they kind of continue at that sequential rate, and we should just see increasingly better year over year numbers.

[Andrew Kligerman, Managing Director at TD Securities]

So just want to make sure that observation is right. And then

[Joseph Lacher, President & CEO at Kemper]

That observation is 100% right, Andrew. If you back up like a two quarters, I think it was maybe it was three, we showed you, but we had a particular slide in there that showed

[Andrew Kligerman, Managing Director at TD Securities]

Oh, is that?

[Joseph Lacher, President & CEO at Kemper]

Pardon me?

[Andrew Kligerman, Managing Director at TD Securities]

Yeah, that's right. I remember it now.

[Joseph Lacher, President & CEO at Kemper]

That showed the year over year and it showed the sequential quarter and we showed you the challenges with those. And what we've got is we've always had seasonality on sequential quarter in this business. So if you went through and you and we gave you PIF numbers. If you went through and you looked at 'sixteen, 'seventeen, 'eighteen, 'nineteen you would have seen that the third to fourth quarter usually saw a negative you know PIF it dropped and then you saw big numbers in the first and the second. It made sequential quarter numbers hard for you guys to reach so what we did is we encourage you to look at year over year because then you just get a rolling four quarters and you're always dropping off the and putting one in and you get a comparative period, so it's useful.

[Joseph Lacher, President & CEO at Kemper]

When we made a massive pivot from slowing new business and declining PIF to turning it back on, year over year would not let you see that change, so we pointed you to sequential quarter. The first quarter of twenty twenty four was negative, then you saw a positive, then you saw a positive, then you actually the fourth quarter was really is a small positive, it was really good compared to normal. As you get into the first quarter of next year, you'll go back to having a twelve month period that are more on the same trend. My guess is you're going to see the second quarter of twenty twenty five look better than the second quarter of twenty twenty four. So I think there still might be one or two quarters where you might want to look at both year over year and sequential quarter because I think you're going to see that year over year continue to rise a little bit and you're going to want to see both trends.

[Joseph Lacher, President & CEO at Kemper]

By the time we get to mid year next year, it's probably clean to look at a year over year because that will give you a seasonality adjustment. So I think both are useful for at least one or two more quarters. But you're right, the underlying year over year is going to continue to get better, likely at least through the middle of next year.

[Andrew Kligerman, Managing Director at TD Securities]

Yes, that's very encouraging. And then maybe you could give us a little color. I mean, are the Q and you said to continue to look a little bit at the sequential trends. I mean, is Slide nine indicative of what we're likely to see in 2025, kind of those sequential numbers are and you gave good color on California and Florida and Texas in terms of hard market and more balanced market with the other two big states. And then, like, what's going on in other?

[Andrew Kligerman, Managing Director at TD Securities]

Like why is that so strong? And maybe a little color there. So should those A, should those sequentials continue at those paces? And B, what's going on in other that made it so strong?

[Joseph Lacher, President & CEO at Kemper]

Let's I want to break this in two parts. I'm going to let Matt do the other. I'm going to start with the overall. Let's take the sequential. And you see the 1.8 in total there?

[Joseph Lacher, President & CEO at Kemper]

Mhmm. On the quarter over quarter?

[Andrew Kligerman, Managing Director at TD Securities]

Yes.

[Joseph Lacher, President & CEO at Kemper]

Do I think? That is not in any way shape or form what we expect the sequential quarter to fifth growth to be in the first quarter. That is way lower than what we expect that to be. The fourth quarter is a seasonally note low number. It will be much higher.

[Joseph Lacher, President & CEO at Kemper]

So if you took that and you expected sequential quarter PIF growth to be 1.8 for the next three or four quarters, you would absolutely miss a pick. It's going to be way higher in the first and second quarter. That for non standard auto that's what we talk about buying season. It's a combination of people getting tax refunds, it's a combination of they've paid off their holiday bills, and so maybe they have a little more disposable income, sometimes they're looking at it, you know, as you've gotten through winter months and in your summer, whatever combination of things there are, you get a buying season that sees a lot more activity, in the first two quarters of the year. So if you said does outperforming our historical run rate will that continue?

[Joseph Lacher, President & CEO at Kemper]

Yeah. Does the 1.8 run rate? No. It is a seasonal number which is traditionally low. I would expect meaningfully higher in the first part of next year.

[Joseph Lacher, President & CEO at Kemper]

The relative basis, California is running great, Florida and Texas are a little behind, those will accelerate, other likely will be higher. Ultimately, I'd expect California to have one rate, Florida and Texas would be higher than that, and the all other would be higher, than Florida and Texas. That's the pattern that you'll see when things rebalance, and we're still rebalancing a little bit. Does that make sense on the first part of the question?

[Andrew Kligerman, Managing Director at TD Securities]

Yes, super helpful.

[Joseph Lacher, President & CEO at Kemper]

Okay. And then do you want to give us some color on Florida and Texas and other? Andrew asked about other, but there's a little Texas too.

[Matthew Hunton, Executive VP & President of Kemper Auto at Kemper]

Yes. So I mentioned the dynamics in California that are driving production. Florida, I'd categorize Florida as a normal marketplace. I think the responsiveness of the OIR in Florida has been great, the encouragement on rate. We're seeing companies actually having over corrected in Florida.

[Matthew Hunton, Executive VP & President of Kemper Auto at Kemper]

I think the tort reform is starting to work its way through. So we're seeing jockeying on pricing that you would see in a normal environment. Some companies taking rates up, some companies taking rates down. In Texas, Texas is a more traditionally soft market because the number of competitors in that marketplace, you have almost 1,000 competitors in that marketplace. We have positioning repositioning our product in Texas that we're launching out pretty soon.

[Matthew Hunton, Executive VP & President of Kemper Auto at Kemper]

So you'll start to see Texas come online here as we work over the next few quarters. In the smaller states, we have a small base there. And so as Joe mentioned, we expect significant growth in those markets as we as the rebalancing takes hold. So optimistic about production across all markets. They're just at different levels of maturity of the rebalance.

[Andrew Kligerman, Managing Director at TD Securities]

Got it. Super helpful. And just quick for Brad. The earned rate, should we expect about two to three points of earned rate in the first half of the year?

[Bradley Camden, Executive VP & CFO at Kemper]

Well, Angel, we've gotten away from really forecasting that earned rate and we haven't supplied it in a while. What I would tell you, and this is going to be higher than that in general just given you know, the California FR limit changes coming through. I think the best way to look at it is, you know, we expect, you know, earned rate and loss trend to be relatively equal and maybe a loss trend a little bit higher as we've told you slowly over the next several quarters, the underlying combined ratio will move up ever so slightly. But that's the best way to think about it. Just looking at the earned rate now, we've gotten through that, that journey the last couple of years and, you know, to be more stable.

[Bradley Camden, Executive VP & CFO at Kemper]

Thank you. It builds on Brian's question a little bit about the FR limits. If you went and tracked rate filings, you're going to see a big rate filing, a big approval that's going to work its way through in California for the FR limits. It doesn't impact margin. So if you just took all of the filed and earned rate and tried to project margin, you're going to get it wrong with that.

[Bradley Camden, Executive VP & CFO at Kemper]

That's distorted. So Brad's point is 100% correct. From a modeling perspective, ignore the FR limit for margin, use it there for revenue. And for the other rates they're going to be roughly in parallel the loss trend.

[Andrew Kligerman, Managing Director at TD Securities]

Thanks very much.

[Operator]

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

[Jon Paul Newsome, Managing Director at Piper Sandler Companies]

Good evening. I've got a couple three, I think, pretty simple questions. The one is looking at the California wildfire exposures. Is it really kind of just as simple as the fact that people drive their cars away and wildfires that is the reason for the relatively, low amount of claims for these folks?

[Joseph Lacher, President & CEO at Kemper]

Yeah, it's two or three things Paul. One, we don't have meaningful homeowners exposure. So people are starting to think about and worry about homeowners. Two, if you look at where the fires were, our customers don't live in Pacific Palisades. So they were the fires were occurring somewhere else.

[Joseph Lacher, President & CEO at Kemper]

And three, people tend to drive away from those items so we get some benefit of that. But it's the no homeowners or customers aren't living there and a little bit of they're driving away.

[Jon Paul Newsome, Managing Director at Piper Sandler Companies]

One question I've got quite a bit is, whether or not there's going to be some sort of disruption really at the distribution level, either for regulatory reasons or simply because LA is kind of a mess. Is any thoughts on that? Or do you think at the distribution level there could be any sort of changes? Just given the Absolutely.

[Joseph Lacher, President & CEO at Kemper]

Help us understand what you mean on distribution level. You mean agents or something else?

[Jon Paul Newsome, Managing Director at Piper Sandler Companies]

Agents being able to actually do the sales and then they're sometimes agents are more focused on claims or other things during this kind

[Joseph Lacher, President & CEO at Kemper]

of We're not remember the markets for a second. You might have, you know, in a high net worth business, you might have agents worried about settling claims. The agent who's selling a homeowner's policy to customer in Pacific Palisades is not selling a specialty auto customer, a policy or to our specialty auto customers. There's just not a Venn diagram overlap of these issues. Our agents are in the communities where our customers live.

[Joseph Lacher, President & CEO at Kemper]

It's it's, it's there's just not a big overlap. If there is a

[Joseph Lacher, President & CEO at Kemper]

disruption or something

[Joseph Lacher, President & CEO at Kemper]

that happens, we're not going to wind up sealing it on related to disruption and agents being distracted with something else.

[Operator]

Your last question comes from the line of Brian Meredith from UBS. Please go ahead.

[Brian Meredith, Managing Director at UBS Securities LLC]

Yes. Hey, Joe, just one big picture one just sort of thinking about, and you may have talked about this before, but longer term, how wise is it to have California being 50%, fifty one % of your overall business mix? Just I know it's a good environment right now, but longer term, how do you think about that and diversifying away from it?

[Joseph Lacher, President & CEO at Kemper]

Yes. If you back up prior to the Infinity acquisition for Kemper, California was roughly 90% of our specialty auto business. The Infinity acquisition brought it down, and every piece of material we've shown you since then has shown us systematically writing, more new business other places and having growth rates higher outside of California than inside of California. Right now, our new business volumes, as a percentage of total are smaller for California than our total PIF count is for California. I'm not going to give you those exact numbers, but that suggests there's a diversification.

[Joseph Lacher, President & CEO at Kemper]

You can see it, if you look at the growth rates. The overall books in the quarter grew 1.8%, California was 1.5%. I think Matt told you that Florida and Texas had a slight slowdown in the quarter that will change, next quarter. If that happens and you put those in a more traditional level of California was 1.5% and Florida, Texas were 2.5% and the others were 3.5% you'd be systematically watching us change that mix. We make a lot of money in this business inside of California, so it's a good business for us.

[Joseph Lacher, President & CEO at Kemper]

We're really good there and we are systematically diversifying the portfolio. In addition, if you look at our commercial vehicle book, which is a fairly significant part of CV, its share of California is more like a third, you know, between 3337%. So it's more geographically diversified. So we're working on it. The only way to do it more rapidly would be to shrink California.

[Joseph Lacher, President & CEO at Kemper]

And I remember how anxious these calls were when the PIF was shrinking. The more appropriate and thoughtful way to do it is to to grow more rapidly in the other geographies, which is what we're doing. And and I'm sure every year for the next five years you're going to see other geographies be bigger.

[Operator]

There

[Operator]

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

[Joseph Lacher, President & CEO at Kemper]

Hey, thank you guys for your time and your attention today, and your thoughtful questions. We appreciate it. Very excited about the results we delivered this quarter and very optimistic as we roll into the buying season, for what we're going to see in the early part of next year and we look forward to talking to you then. Thanks a lot.

[Operator]

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

Participants

Executives

• Michael Marinaccio, Vice President of Corporate Development
• Joseph Lacher, President & CEO
• Bradley Camden, Executive VP & CFO
• Matthew Hunton, Executive VP & President of Kemper Auto

Analysts

• Gregory Peters, Managing Director - Equity Research at Raymond James Financial
• Brian Meredith, Managing Director at UBS Securities LLC
• Andrew Kligerman, Managing Director at TD Securities
• Jon Paul Newsome, Managing Director at Piper Sandler Companies