As Greg mentioned, I'm Joe Lacher, Kemper CEO, Brad Camden, our CFO. You know, the pandemic put the company, put the auto insurance industry, and you alluded to this, in a position where we basically saw, with the demand surge, the inflation surge, as things started to reopen, 30 - 45 points of inflation running through a marketplace that is designed to respond slowly from a regulatory perspective, and the way policies, rates come in at renewal, you have to get rates approved with a regulator beforehand. It takes a while for things to earn in. There's an inherent lag in it. One of the reasons so many of us have heard in the last 12 or 18 months that one of the big drivers of inflation is auto insurance increases is the inherent lag in that process, so like all carriers, we were dealing with that.
For us, our biggest market and state is California, represents about 55% of our auto premium. And they, in particular, delayed rate increases after the pandemic more than anybody else. We saw a 35% increase get approved in August of 2023. It takes a couple of months for it to start to become effective. So it really worked its way in through 2024, and we saw the earned impact. Sometimes I describe that as a little bit like a kid with an ear infection getting a shot of antibiotics in the butt. Once the shot was in, the organism started to feel better and work better. And so 2024 was really, for us, the result of those rates earning in, getting the organization back to a real robust profitability health, and then reigniting the growth engine inside of the company. We'd slowed growth down when we weren't hitting appropriate margins.
As we got into the back part of 2024 and rolling into 2025, a business with very attractive margins, very attractive growth rates, and are really in a position to capitalize from an insurance industry perspective, which generally characterized as a hard market. That's a case where many competitors are still tight on their underwriting perspective. If you're healthy, you can generate outsized growth and outsized returns for some period of time. We're very pleased to be in that spot and looking forward to capitalizing on that as we work our way through 2025.
Yeah. The only thing I'd add from Joe's comments is, yeah, we're growing, strong margin, but more importantly, that strength and flexibility is back. So in February of 2025, we repaid $450 million of debt, bringing our debt-to-cap ratio down in the low 20s. So we're growing, strong margins, and significant financial flexibility as we move forward to support what we believe will be a strong growth year in 2025.
Excellent. So I know the auto insurance market is really not a national market. It's a state market. Maybe you can—you mentioned California as your biggest state. Maybe dissect the top three largest states and give us a sense of where they are in the cycle of growth?
Sure. As you point out, the auto business in the U.S. is not just one business. It's a state-level business. It's also got two real big segments. There's what's broadly thought of as the standard and preferred segment, which is probably what most of us intuitively think about. That's a business that has high customer retentions. There's high stability. Customers typically buy 12-month policies. They buy higher limits. We're in the specialty auto segment, the other part of the business. You tend to have a higher price sensitivity of consumers. Consumers churn a little more regularly. Retentions might be in the 50% range. Higher average premium. A lot more diffused competition. That standard and preferred segment, roughly 80% of the premium in that preferred segment is in the top 10 carriers in the U.S. In the specialty auto business, it's only about 45%. So there's much more diffused competition.
For us, and our size and scale, that becomes a real advantage because we focus almost exclusively in that specialty segment, and we're dealing with less sophisticated, smaller competitors. So the local market becomes even more critical. About half of our business is in California, a little more than half. The next biggest chunks are in Florida and Texas. The California marketplace right now is one that I would describe very much as a classic hard market. The competitors there are still recovering in their underlying profitability. They still have tighter underwriting. There's still effectively an availability challenge for consumers. There are people writing auto insurance, but there's fewer than might be there in a traditional environment because of some of the challenges in that local marketplace. We're comfortable with the adequacy of our rates, with the appropriateness of our return, and we're largely open for business.
And as a result, that provides us an opportunity to generate some outsized growth in that environment because of the reduced competitive environment, because of fewer competitors participating. Florida and Texas are a little bit of a different scenario. Florida sort of sits in the middle of the three. It is a very reasonable competitive environment. They've got reasonable regulatory processes. They've had some reforms recently, which have tamped down some tort challenges. So there's tort reform. It's a reasonably attractive market. And what you're finding is a competitive dynamic that I would describe as more traditionally normal, if you will. Competitors are generally returning to the marketplace. There's general availability there and reasonable returns and reasonable rates. And we're generating what I would say is a traditional growth rate there. Texas is probably the state that has the most number of competitors in it.
It's a state that has traditionally had a high volume of smaller insurance carriers. So it's got the most carriers out there. It's got a reasonably stable regulatory environment. It didn't benefit from some of those tort reforms that Florida had. And because of the number of competitors out there, it tends to be an environment that you've got to be a little scrappier to figure out how to make appropriate returns. But it's functioning normally. It's a reasonable environment, and we believe also presents some opportunity for profitable long-term growth.
Yeah. So as you're turning the spigot on and starting to grow in these markets, the concept of new business penalty comes into play. And maybe can you talk about how the growth, as your growth is accelerating, how that's going to manifest itself with higher loss ratios?
Sure. So you got two or three premises under there. One is a general view that across the industry, most auto carriers will tell you that if they write a new policy, there's a new business penalty. For the first year, loss ratios tend to run higher. What it really is, is there's a sort of a vintage curve there, that loss ratios tend to improve a little bit as policies age with a carrier. So you've got that dynamic. The second piece running through there is we're, if you will, reopening our business. We very much tightened our underwriting. We reduced our new business writings by almost 90%. So we're re-expanding right now. When you reduce them by 90%, you get rid of the new business penalty, so you get a benefit. When you re-expand, you reintroduce the new business penalty, so you get a little pressure.
What we're finding is we took a massive amount of rate post-COVID, enough rate to cover that new business penalty that's getting added. So it doesn't, in and of itself, present combined ratio pressure. We're finding that that's absorbing, being absorbed as we're adding that new business in. And right now, we saw year-over-year growth of about 5% in underlying units. But that really is a four-quarter year-over-year number when the first quarter of the prior year we were actually shrinking. So if you really look at a more annualized, normalized run rate, we're growing in the low teens from a percentage perspective at very attractive combined ratios. So we're absorbing that new business penalty.
And we really, as we think about reopening or turning the dial to get our new business back up to sort of the full level, if you think of the dial at 100% open, covering business that we think makes an appropriate return for us, we're probably only 80% of the way open right now, which effectively means that the business we're writing has a little bit better long-term performance than we would expect the aggregate book to deal with. And part of that is we're just slowly throttling that back up. We're making sure we have all the operational capabilities enabled to handle the business that comes on. You get a higher frequency with new business, so we want to make sure we have the right claim folks in place. And we look forward on that.
We may be positioned where we want to be today, but we're looking forward to, as that business comes on, as the claims are filed, as a normal attrition in our claims units occur, where are we going to be three months out, six months out on staffing, and appropriately throttling to manage that.
You mentioned frequency. Severity is also important. Talk to us about the severity trends. I think one of the questions that is quite relevant today is just the effect of tariffs on car parts and pricing and inflationary pressures from there. So broadly speak to severity and then maybe branch off and talk about the prospective or potential impacts of tariffs.
Underlying severity and underlying tariffs?
Yeah. Severity, our expectation is mid- to high single-digit severity over the next year, year and a half. Historically, loss cost inflation, which is a combination of frequency and severity, was roughly 3%-5%. We're thinking more 5%, 7%, 8% over the next year or so. And we're priced for that. We don't see that causing a significant increase in our margins. In 2024, we had an underlying combined ratio of 91.5%. We ended the year at 91.7%.
And we expect over time, with growth and continued repricing and a little bit of severity trend, we'll get back slowly over time closer to a 93%-93.5%-ish type combined ratio, which is where we were for several years prior to COVID, running somewhere between 93% and 94.5%. But overall, obviously, severity is more elevated than it was pre-pandemic, but we're pricing for that and should have no significant impact on our margins.
Yeah. So tariffs, for us, it's important to break things apart into maybe two buckets to answer that. First, when you have an auto accident, you get two types of losses. You get bodily injury-related claims or you get metals-related claims. Tariffs have no impact on bodily injury claims. So take half the losses aside. So you just deal with the metals. Inside of those claims, roughly half the dollars associated with those are things that aren't metal-related. They're the hourly rate of the body shop employees. They're rental car expenses. They might be storage at a body shop. They might be towing fees. There are any other number of fees that aren't directly related to the actual cost of the steel. So we're actually at a fairly smaller subset of the overall dollars that might be impacted.
Second thing to think about, as Brad talked a moment ago about severity trends, remember how our business works. If we decide today that we wanted to take a rate increase in a state, it's going to take us a month or two to prepare the documents and send them to the state. It's going to take them a couple of months, typically on average, before they review it and approve it. And then we have to have somewhere between 45 and 60 days' notice to a customer before we can change their rate. So that's almost six months that might occur. And then if we're running six-month policies, it's going to take a full six months for all of those to renew with the new rate, and then it'll take another six months to fully earn that.
So we're thinking 12 or 18 months out in terms of what inflation is all the time, not what tariff got dropped on yesterday. So we have to have that longer-term view. The President made no secret during his campaign that he was interested in adding tariffs and where he was interested in adding them. On the first Wednesday in November of last year, we knew that he was coming in. So our inflation outlook took that into account. And so November, December, January, February, March, we've already had this in our pricing plans. We've had it in our view of what's coming and have been working that process on a going-forward basis. So this is a little bit of pressure, but it's not outside of our range of what we would have expected or what we're tuned to handle and manage.
That makes sense. So there's the loss ratio component, and then the expense ratio component. And unpacking the expense ratio, there's commission expense, there's advertising expense, there's other components of other expense that roll up. Maybe spend a couple of minutes talking about the movements of the different buckets last year and then how they might change on a relative basis for 2025.
Yeah. I think it was three buckets: loss cost plus your LAE, so your claims handling and settlement, and then your expense ratio. And your expense ratio is really broken up in two components: acquisition cost, which is your commissions and premium tax, and then everything else, which is underwriting, overhead, direct expense, advertising, all of those things. Historically, Kemper typically had a very low expense ratio in the high teens. And as we've shrunk our policies and premiums come down, think of our costs are 50% fixed, 50% variable. The premium or the fixed costs were going up, and the variable costs, the fixed costs were staying the same. Premium dollars were coming down, and variable costs were coming down. As we grow, and we talk about year-over-year, low teens, mid-teens, PIF growth, you add on some loss costs, inflationary numbers, you add on some repricing and rate increases.
You're looking for a high teens, maybe higher, written premium growth. And so as that comes through next year or this year, expect a little bit of expense leverage or operating leverage and expense ratio to come down a little bit. I don't expect a significant change kind of from 2024 to 2025 because we're still rebalancing. But as we go from 2025 to 2026 and 2027 beyond, expect within our expense ratio, which is in the low 20s now, maybe a point, point and a half, two points over the next couple of years of leverage. And even at the low 20s, Kemper still is one of the most efficient, especially auto insurers, in the market today, which for us, and given our demographic that we serve, is critical because being a low-cost operator allows us to have strong pricing.
Pricing is key and critical for our market segment because they're very price-sensitive. Think of low-income market, troubled credit scores, those types of individuals. They're very price-sensitive, and being a low-cost provider allows us to grow quickly and grow quicker than the market.
Makes sense. From an acquisition standpoint, you have distribution partners. Has there been any change among your distribution partners in the big states, or is it pretty much the same as it was before?
So there's sort of two pieces to that. There's some element that the agencies move up or down. They grow, they combine, they move. There's always sort of some churn in that marketplace. Maybe the more substantive way to answer it, after acknowledging that, is the value proposition they're providing to customers, a very price-sensitive customer with a relatively low retention rate at a carrier level. They're hopping between carriers sometimes from a price sensitivity. They're looking for that agent to effectively do the comparative shopping for them so they don't have to do it themselves. That value proposition is still important to the customer. It's still important to the agent. It still works. What the agents look for us to do is to provide a competitive product and be reasonably easy to do business with, to provide that.
As we're providing an appropriately competitive product, we continue to work to be easier, to be more effective for them. We're in a very strong position inside of those agents and inside of that distribution network. Again, very important to the customers. They don't particularly have a desire to go check with six or seven carriers themselves. That takes a lot of time. They'd rather go to one spot and get a view of price discovery in terms of where they are. So it works really well for us.
Excellent. I'll pivot to two other important buckets with the life business and investment income component. So let's first focus on the life business. Maybe update us on how that business is performing and how you think it should look over the next couple of years.
Yeah. Our life business is a core business for us, a strong performer. We sell low face amount life insurance to low-income individuals who, for religious or social or cultural reasons, it's important to them to have the dignity of a proper end of life. They want to know they had a life insurance policy. We sell absolutely vanilla whole life policies. They're not variable universal life. They're not universal life. There's nothing variable about it. It's just a plain old vanilla whole life policy, which makes them relatively simple to price, relatively simple to service. It effectively operates for us like a spread business, so we match the assets and liabilities, so we're not dealing with a mismatch risk. It produces very reliable distributable cash flows, very strong ROEs, and is a really nice capital diversification benefit inside of our P&C business.
That capital diversification benefit lets us run both businesses with lower economic capital and, as a result, either produce an enhanced ROE or more competitive prices at the same ROE. So it's a real benefit to us. We do not see lapse rates in that business move up or down with economic cycles. We don't see increased lapse rates in recessions. We don't see any movement there. About the only thing we see is in a really high inflationary environment, you see a little bit less new business sales because that customer, when they're thinking about the initial purchase, might be looking at their discretionary income, and they're a little less likely to buy. But we don't see any movement in lapse rates. So this is a business that probably actually has a little bit of tailwind to it over the next couple of years.
And I want to be careful how I say this. We're emotionally sensitive, but people only pass away once. So to the extent COVID accelerated mortality from what a normal annual mortality would be, those people who've passed are now out of the system. That will actually cause some period of time to have a little less than normal mortality because those were accelerated. So we're in a couple of years where there's likely to be a little bit of a tailwind on that that offsets the headwind we had earlier. But a business that, again, produces very consistent, stable, distributable cash flows, attractive returns, and provides a real important value to our customer segment.
Makes sense. And then pivoting to investment income, which is another important area for you guys.
Yeah, definitely. Pre the pandemic, we were writing an underlying combined ratio pretty consistently, 93%, 94%. And we had a more balanced investment portfolio. Call it roughly 80%, I call risk control assets and 20% risky assets. As the combined ratio.
Riskier, but not risky.
Yeah, riskier. Think of private equity, public equity, some high yield, those types of investments, traditional investments, I like to call them. And as the pandemic hit and we saw the combined ratio move up, we had to de-risk the investment portfolio a little bit so that we stayed within our overall corporate risk appetite statement. And so now, as the combined ratio is improving, we can take our investment portfolio, which is roughly, let's call it 90% risk control assets and 10% riskier assets. We can move back more towards that 80/20 where we were pre-pandemic. The result over the next year to year and a half will be an increase in net investment income as we redeploy lower risk assets into riskier assets. So think of investment grade to high quality, high yield. And you're picking up a couple of hundred basis points and spread their overall yield.
And then also, as we grow, we'll also get more premium in the door. We'll have more float on our balance sheet or more assets to invest, and net investment income will improve as well. And so I've indicated previously, on a quarterly basis, about $105 million of net investment income. I'd expect that to grow several million a quarter in the back half of the year and for the foreseeable future.
Yeah. Sounds like interesting. Can we pivot to the balance sheet for a second? Because, boy, it was fascinating to watch the evolution of sentiment on your company over the last two years where you went from, "Oh, no, they might be a little deficient on capital," to all of a sudden, you're buying debt back, you're buying stock back, you're paying debt down. A remarkable turnaround from a company that, if some were to be believed, was under a lot of capital pressure. So update us on your capital position and the outlook there.
Yeah. Capital is very strong. Maybe I'll start with liquidity. Still have north of $1 billion of liquidity. All of our P&C entities remain well above regulatory minimums, very strong capital position, whether that's on the life company or the P&C company. Things are looking very strong. We, as Greg mentioned, we repaid, and I mentioned earlier, $450 million of debt, which is a big chunk, roughly one-third of our debt. One quarter of our debt we repaid in February. We bought back $40-ish million of stock, and things are looking really good. We have plenty of capital to fund our growth, so we're expecting, as Joe talked about, high teens premium growth this year, so we have plenty of capital to fund that. We have plenty of capital to be opportunistic with share repurchases and do anything else that we need to do over the next year plus.
Yeah. So the message there is that even with the higher elevated or higher growth rates, you're still in an excess capital position because of the core underlying results of profitability.
That's correct.
Yeah. Excellent. I guess we're running up against time here. Pretty interesting outlook for your company. As I think about the next 12-18 months, realistically, what can go wrong? The California wildfires, really not an event for you guys. What can go wrong from an investment standpoint?
I hate when somebody asks that question that way because you feel like you need to go knock on wood. But we could have a significant economic event that caused a significant disruption in our entire investment portfolio. That's not anything idiosyncratic to us. That's a broad investment portfolio environmental item. We'd have to see something where we collectively saw loss cost inflation shoot up five or six points or more inside of a 60 or 90-day window beyond what we would have expected. A very rapid rise in inflation, which is hard to imagine, or some real meaningful negative tort reform, like some reversal in certain geographies. You'd have to see those kind of items. Now, there's other things I can think of that are bad things that can happen.
I just don't see there any reasonable way inside of an 18-month time period to get into a regulatory environment or some other environment that triggers that. It's hard to imagine. We have very limited Cat exposure now. The Cat exposure we would have would have to be a big flood type event, which even that, a large chunk of our policies are liability only. It's not like that exposes us even to a quarter's worth of earnings. It's a more modest piece. It places in pretty good shape for the foreseeable future.
Excellent. Well, we've hit the 30-minute mark, so we'll bring management downstairs to the breakout room.