Good afternoon, ladies and gentlemen, and welcome to Kemper's first quarter 2026 earnings conference call. My name is Mark, and I will be your coordinator today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instruction will follow at that time. As a reminder, this conference call is being recorded for replay purposes. I would now like to introduce your host for today's conference call, Michael Marinaccio, Kemper's Vice President of Corporate Development and Investor Relations. Mr. Marinaccio, you may begin.
Thank you, operator. Good afternoon, everyone. Welcome to Kemper's discussion of our first quarter 2026 results. This afternoon, you'll hear from Tom Evans, Kemper's Interim Chief Executive Officer; Brad Camden, Kemper's Executive Vice President and Chief Financial Officer; Matt Hunton, Kemper's Executive Vice President and President, 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 first quarter results, followed by a Q&A session. During the interactive portion of the call, our presenters will be joined by John M. 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. Published our earnings presentation and financial supplement. You can find these documents in the Investor section of our website, kemper.com.
Our discussion today may contain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, the company's outlook on its future results of operation and financial condition. Our actual future results and financial condition may differ materially from these statements. For information on additional risks that may impact these forward-looking statements, please refer to our 2025 Form 10-K and our first quarter earnings release. This afternoon's discussion also includes non-GAAP financial measures we believe are meaningful to investors. In our financial supplement, earnings presentation, and earnings release, we've defined and reconciled all non-GAAP financial measures to GAAP where required in accordance with SEC rules. You can find each of these documents in the Investor section of our website, kemper.com.
All comparative references will be to the corresponding 2025 period unless otherwise stated. I will now turn the call over to Tom.
Thank you, Michael. Good afternoon, everyone, and thank you for joining us. As I've done in previous quarters, I'll use my comments today to discuss how we look at the business, provide some context on the quarter's results, and more importantly, update you on our primary focus, which is to improve profitability, reduce volatility, and deliver value to our shareholders. Turning to the business, I think it's worth a brief reminder of who we are. We are a specialty insurer operating in a multifaceted, competitive industry. We concentrate on distinct customer segments and markets that are not the primary concern of larger carriers. Through our two core segments, Auto and Life, we provide affordable, easy-to-use, personalized solutions to individuals, families, and small businesses. We have a deep understanding of our customers and have developed products and services designed to meet their needs.
We see meaningful near and long-term opportunities across both businesses. Before we discuss the quarterly results in detail, I want to note the main takeaways for the quarter. Overall, financial results were disappointing and did not meet our expectations. Notably, we continue to face significant headwinds in our California personal auto business. Results were also impacted by statutory premium refunds in Florida. What should not get lost in the narrative, however, is that we have several areas of the business that are performing well, and we will discuss these shortly. First, let me spend a moment on Florida. The refunds are a function of state law that requires insurers, if profits exceed certain thresholds over a three-year period, to return a portion of profits to policyholders. Last quarter, we explained how tort reforms enacted in 2023 have reduced loss costs and made the Florida market more competitive.
Brad will discuss the effect of these refunds on our financial results. Importantly, our current auto business in Florida is performing well, and the rate adjustments we've made are leading to profitable growth. Matt will share more on Florida in a bit. As for our personal auto business in California, the increases in minimum liability insurance limits that went into effect in January 2025 continue to complicate and exacerbate loss costs. We believe we have a good grasp of the issue and are taking targeted actions to respond, including rate changes that are coming into the market in the second quarter, underwriting refinements, and claims process adjustments. The benefits of these changes will take time to be clearly visible in results. Matt will have more to share with you on California.
While we clearly need to improve the California PPA results, there are bright spots in our business that should be noted. Among items we are encouraged by are the continued strong growth and attractive results of our commercial auto business, which just finished its best production quarter ever. Kemper Life continues to deliver solid, consistent results and remains a source of diversified earnings. While the specialty personal auto results as a whole were not where we wanted them to be, we did see positive developments with profitable PIF growth in Florida and Texas, great approvals in California, and new product expansion that went live in Florida and was approved for rollout in Texas. On our earnings call in February, we outlined a number of enterprise priorities.
We are making progress on our actions to improve results, enhance operational execution, and reduce earnings volatility through diversification. As I noted, we are focused on growing profitably and reducing earnings volatility. As we reposition our personal auto book, we expect California to represent a smaller percentage of our overall portfolio. It will remain our largest market for the foreseeable future, and we continue to see value in our presence there, given the size of the market and our differentiated expertise in operating in the state. The restructuring program we launched last fall is well underway. To date, we've identified cumulative run rate savings of more than $60 million, the majority of which has already been actioned. We continue to expand this program to further optimize operations and increase efficiency. We were also engaged in a comprehensive review of our end-to-end claims processes.
We have identified and are executing on some early opportunities to reduce loss costs. Brad and Matt will provide more detail on the actions we are taking, which will protect and advance our competitive advantages, enhance profitability, enable growth, and ultimately create value for our shareholders. Brad, over to you.
Thank you, Tom, and good afternoon, everyone. Let me start with a clear perspective on our performance this quarter. While results did not meet expectations, the shortfall was driven by two specific issues. Outside of these, the broader business is performing well. I'll walk through those items, what we're doing to address them, and what's working well. I'll begin on slide five with Personal Auto. Performance this quarter was primarily impacted by elevated loss costs in California and statutory premium refunds in Florida. In California, the environment remains our most significant headwind. The increase in minimum liability limits effective January 1, 2025, has led to greater attorney involvement in claims and higher loss costs. This trend has developed over several quarters. We are addressing it through rate and non-rate actions, along with targeted claims process improvements.
In Florida, the 2023 tort reform has materially improved PIP coverage performance. As a result, profitability exceeded regulatory thresholds for the most recent rolling three-year periods. Subsequently, we increased our policyholder premium refund liability for accident years 2023 through 2025 and established a new liability for 2024 through 2026, reflecting our current loss expectations. We are taking actions to improve Personal Auto performance in California, and outside of that market, results remain solid. In Florida and Texas, two key Personal Auto growth states, policies in force increased 4.9% sequentially, with an underlying combined ratio of 93.7%, reflecting continued growth and attractive returns. In Commercial Auto, performance remains strong. We achieved record production and exceeded $1 billion in trailing 12-month written premium for the first time.
Policies in force increased 3.2% sequentially and 10% year-over-year, with a strong underlying combined ratio of 92.4%. In Life, results were stable, with operating income of $18 million, supported by lower expenses and favorable mortality and lapse experience. From an investment perspective, net investment income was $107 million, up $4 million sequentially, primarily reflecting stronger alternative investment performance. In total, we recorded a GAAP net loss of $1.7 million, or $0.03 per share. Adjusted consolidated net operating income was $12.5 million or $0.21 per share. Excluding the impact of Florida refunds, adjusted net operating income was $34.6 million or $0.59 per share. Turning to slide six. Over the past several quarters, we have taken and continue to take actions to improve profitability, reduce earnings volatility, and support growth.
Our focus is on three areas: restoring Personal Auto margins, diversifying outside of California, and reducing expenses. To improve margins, we have implemented non-rate actions and filed for rate in California. We received approval for a 6.9% rate increase on 2/3 of the book, effective April 6th. The remaining 1/3 of the book has received approval for a 3% increase, effective early June. We expect initial benefits in the second quarter with a more meaningful impact in the second half of the year. We are also advancing portfolio diversification. Our new Personal Auto product has been expanded into Florida and approved in Texas. This product will improve alignment between rate and risk, helping support growth. At the same time, we are reallocating new business toward more profitable markets and reducing exposure in underperforming states, particularly California. On expenses, we continue executing our restructuring program.
We've identified approximately $60 million in run rate savings with additional opportunities under evaluation. Moving to slide seven. This slide outlines the restructuring progress since the third quarter of 2025. I'm going to discuss this in two pieces: expenses and loss cost management. On expenses, we are focused on organizational design, process improvements, and leveraging technology to increase scalability. We've identified $60 million in run rate savings and actioned $50 million to date. Our medium-term goal is to reduce the specialty auto expense ratio to below 20% from approximately 22% today. Moving to loss costs, we see meaningful opportunity in claims efficiency. With three-quarters of premium allocated to losses and LAE, even modest improvements can drive significant value. We've engaged a third party to review our end-to-end claims processes, starting with third-party liability. While still early, we see clear opportunities to improve loss and LAE performance.
I'll now turn it over to Matt to discuss the Specialty P&C segment.
Good afternoon, and thanks, Brad. Let me start with a clear view of the quarter for the P&C segment on slide eight. As Brad and Tom already mentioned, California Personal Auto was a distinct challenge in the quarter. While the impact was significant, the rest of the business contributed positively. Let me start with California. We continue to see elevated liability loss costs driven by broader legal system dynamics. We are taking tangible actions to address these challenges. We recognize the shift in these trends and move decisively to bring pricing back in line with our long-term economic targets. Those great actions are now approved and are beginning to earn in as we move through the year. At the same time, our claim organization has started to refine and enhance end-to-end processes, particularly targeting third-party claim management and attorney involvement.
As a result, we are beginning to see favorable offsets with modest reductions in liability severity. Importantly, we're seeing early signs that the California market is becoming more favorable, with carriers across the industry both filing for rate and taking non-rate actions to restore profitability. While California remains a headwind today, the combination of our internal actions and improving external conditions gives us increasing confidence in the path to recovery. As we think about this broader portfolio, the key priority for us is geographic diversification, ensuring we are balancing the business across markets and reducing concentration risk while maintaining strong returns, as highlighted on slide nine. That strategy is clearly coming through in Florida and Texas. The product tuning actions we took late last year are having the intended effect. We are seeing growth in policies in force, and importantly, that growth is coming through at attractive profitability levels.
These markets play an important role in rebalancing the portfolio, positioning us for more consistent performance over time. Let me also briefly touch on commercial auto on slide 10. This continues to be a bright spot in our specialty business. We continue to demonstrate strong, consistent growth across multiple geographies while also achieving stable profitability. The business has delivered a combined ratio in the low 90s while growing at 23% annual rate since 2019, demonstrating both the quality of the book and the strength of our execution. Importantly, our Commercial Auto business, which offers specialized products for small businesses, is becoming a larger contributor to the overall portfolio. Our approach is intentionally focused on targeting small business segments where we have both expertise and a competitive advantage.
As this business continues to grow, it plays a meaningful role in further diversifying our Specialty Auto business, helping balance exposure across geographies and products. Finally, let me touch on a few of the strategic investments we're making to support the next phase of performance. We're encouraged by the early progress of our new product, BVP, which stands for Basic Value Plus. BVP materially advances our pricing framework and builds on our investments in data and data science over the past several years, enabling more precise risk selection and matching of rate and underlying risk. This product enhances our ability to reach customers across our target markets. BVP has been in the Arizona and Oregon markets for over nine months, and we've seen encouraging early results.
We launched in Florida at the end of the first quarter, and we recently received approval in Texas with a rollout planned in the second quarter. While it's still early, we're gaining momentum, and the indicators are aligning with our expectations. We believe this will be an important contributor as we scale and drive profitable growth over time. We've also launched a series of new customer and agent self-service capabilities, including enhanced portals and digital tools. These investments are designed to improve the customer experience while also boosting operational efficiency, simplifying key service and claim interactions. Taken together, these initiatives support near-term performance while strengthening a more scalable, efficient, and durable operating model for the business. Stepping back, while this quarter reflected concentration pressures driven primarily by California Personal Auto, many other parts of the business are performing well.
We are taking decisive actions to improve performance, and while it's still early, the initial signs are encouraging. We are not where we want to be yet, but we are making real headway and believe the actions we are taking will enhance future financial performance. Thank you. I'll now turn the call over to Chris to cover the Life business.
Thank you, Matt. Good afternoon, everyone. Turning to our Life segment on slide 11. The Life segment delivered another quarter of solid performance, generating a reliable contribution to consolidated earnings. Earned premiums increased slightly year-over-year. We ended the quarter with approximately $ 19.7 billion of in-force face value, reflecting consistent production to stable policyholder behavior. Adjusted consolidated net operating income was $18 million in the quarter, up slightly from the prior year period, supported by expense management and favorable mortality and lapse experience. Last quarter, we updated our product portfolio and expanded distribution of our liability offering. Results are tracking in line with expectations. Average face value per policy increased modestly. Average premium per policy issued rose approximately 7%, reflecting strength in pricing and business mix. Our total revenues grew, driven by earned premiums and net investment income.
We are also modernizing our life distribution model to enhance agent productivity and better align incentives to drive new business growth and further improve persistency. In closing, the Life Business continues to perform well and deliver consistent results to the overall portfolio. I'll now turn the call back to Tom for closing comments.
Thanks, Chris. Before I provide closing remarks, I'd like to give a quick update on a couple of leadership items. Regarding the ongoing CEO search, the board continues to make meaningful progress. There is strong interest in the role from highly qualified candidates who recognize the value of our brand and the significant opportunity that lies ahead for Kemper. We will provide an update when we have more to share. I'm also pleased to share that we have a new Chief Information Officer joining our executive team. Kelly Coomer joins us with a 25-year background in insurance technology leadership. We're excited to have her as we accelerate our technology strategy to support our key initiatives. To close, we remain focused on returning the business to the level of performance we expect and know it can achieve.
While this was a challenging quarter, we are taking decisive action to improve performance and strengthen execution across the business. We believe in our core businesses and the value we bring to our customers, and we are moving with deliberate speed and accountability to drive better outcomes. We look forward to providing updates on our progress in the quarters ahead. Thanks for your time today, and we will now take questions.
We will now begin the question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask you that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Gregory Peters with Raymond James. Gregory, please go ahead.
Good afternoon, everyone. I guess for the first question, I just focusing in on California, and you know, the challenges that you're reporting there. It's noted that you talked about the rate increases that you're going to start to implement this year. It just doesn't seem like it's enough to get you down to the threshold of what your return targets look like. I guess my question is: Is there anything that you can do on the upfront risk selection to drive a better result in the California auto? Related to that, I guess, are you anticipating filing for another round of rate increases anytime soon, considering where the profitability of the business is?
Greg, this is Matt. Great question. The short answer is yes. We have a bunch of obviously rate actions that are going to market today. Two-thirds of our book got rate implemented last month. We have the other third of our book is getting rate implemented next month. We have another set of filings out with the Department already on the private passenger side to ensure that we're getting to the rate adequacy levels, especially on the liability coverages, which is obviously where most of the noise is as it pertains to the FR changes specifically in the minimum limits category.
You know, when you look at the rate action, the 6.9% that's filed, the reason we do that is obviously as we work with the Department of Insurance, is we think it's an expeditious, the most expeditious way to get to the rate need that we have. The impact of the rate varies dramatically by coverage. For example, if you dissect the April change that we put in place, although in aggregate it's 6.9%, it's about 50 points on bodily injury. It's textured in a way that's getting to the coverages of rate adequacy, and that will accelerate the combined ratio as that mix works its way through. That's certainly on the rate side. We, you know, like I said, we have another filing that's out there.
Today, we have likely a subsequent filing once the May filing goes effective that will be released as well. There'll be a total of, I believe, about four filings that we'll hope to get effective this year that will impact, you know, the PPA book of business. On top of that, the other leverage that we are pulling, we've talked about, you know, the run-up in attorney activity and legal system abuse is impacting obviously bodily injury and PD severities. We're accelerating some claim efforts there that we're seeing early benefit that's offsetting the BI increases, actually seeing BI severity come down. That's working.
As Brad touched on, there's a series of expense actions that we have in place that will drive the combined ratio back down to targets as expeditiously as possible. Quick comment on the California marketplace. We took action in the back half of last year. Our filings were released in the early part of this year. We are actually seeing early signs that competitors are taking action as well. We obviously interact with many of our peers, you know, on the claims side, business management side. We are seeing filings coming through the Department of Insurance, similar type rate needs in other categories. Obviously, the carriers that have been most impacted by the FR changes are the ones that operate in the minimum limits category.
Obviously, our book in California is about 90% minimum limits. We are seeing other carriers on the non-rate side take action and on the rate filing side take significant action as well.
Thank you for that detail. You know, as I'm watching the different parts of your business move and each state has its own rhythm, so to speak. I'm mindful that, you know, an important part of your business is your distribution relationships. I'm just curious how they're responding, how your agent relationships are working when there's some volatility around how you're pricing business and how your competitors are behaving. Just wondering if you're experiencing any shift in how your product's being distributed considering the challenges you've had over the last year.
Yeah. Our agent relationships, we have long tenured relationships with many of our partner agents. We're very transparent with them in terms of what we're seeing in the marketplace, where our costs are headed. We have sort of a good back and forth in terms of how we navigate some of these cycles. There's been quite a few cycles in our business over the last few years. With that said, we are making pretty significant investments in enhancing capabilities with our agent distribution partners. We've launched a series of new agent interaction portals on both the new and the renewal side, which has helped for agents as they're navigating. We are launching new products. Obviously, we mentioned the BVP product.
Those are all positive signs to our agents as we continue to sort of stay committed in the marketplaces where we're open for business, specifically California, Florida, Texas, Arizona, Oregon, Colorado, right, where we continue to maintain a presence in the marketplace, marketplaces we play in. We're not seeing any negative impact on the distribution relationship side. We actually have a pretty significant queue of agencies that want appointments from us. We are working that thoughtfully. Obviously, when we think about expansion, it is profitable expansion. We're trying to get our combined ratios back in line with our targets, then we'll thoughtfully, you know, grow policies in force. We do have a queue of agents that want access to our products.
Just a clarification. When we talk about distribution, there's the Specialty Auto business and then the Commercial Auto business. Is it oftentimes the same agent that's producing business for both types of products?
Yes. There's significant overlap between our two businesses. Our Commercial business is very much so a draft strategy to our Personal lines business. The individual risks that we insure on the personal line side, on the Commercial line side, we insure their small businesses. Most of our agents that are appointed with Commercial, our Commercial products already have a Personal lines appointment. The customer base is very much so aligned.
Got it. Thank you for your answers.
Your next question comes from the line of Brian Meredith with UBS. Brian, please go ahead.
Thanks. I guess first question, just curious, I'm looking at your Commercial Auto results. You continue to have adverse reserve development on there. Maybe you can talk to me a little bit about what's going on there, how comfortable are you with the profitability given the development you've been having.
Hey, Brian, good afternoon, this is Brad . You know, as you've seen over the last couple quarters, we have had some adverse development in commercial auto, commercial vehicle. It's the same thing that we've been talking about. It's, it's higher severity trends and bodily injury, the bodily injury coverage. You know, this isn't, you know, outside the range of normal expectations. When you think about reserving range, you reserve, you know, in the 50%-55% range. Half the time you're going to be higher, half the time you're going to be lower. Just given the trends and what we're seeing, particularly in California, you know, a little bit of an adverse, this quarter, improving from last quarters. And it continues to be on older accident years, particularly in accident years, 2022 and 2023.
Now that we're roughly three and a half, four years away from those vintages, most of those accident years now and claims are fully developed. Pretty good feeling with where we stand today from a reserving standpoint. Nothing new there from what we said in the previous quarters.
Gotcha. Second question, Brad. Just could you comment a little bit about the capital, you know, situation? You know, I notice you're now down to a 225 RBC ratio. You've only got $80 million in holdco liquidity. You know, anything that, you know, to think about there? It seems like it's lower than it's been in several years.
It's, you know, within the normal range, Brian. It's a little bit lower on a quarter-over-quarter basis. It's a little bit lower than where it was last year. We still have, you know, plenty of flexibility from a liquidity standpoint, you know, $750 million and $100 million of liquidity. The capital from an RBC standpoint, that's looking at each legal entity. I remind you of that. That's not reflective of the entire ecosystem capital. That's just the P&C entities there and the Life entities. We do have, you know, capital throughout the ecosystem at the holdco and elsewhere. Nothing to worry about. You know, it's within our range of 225%-300%, which we've been operating in for some time now. You know, our expectation is that we continue to improve our results and grow from here.
Great. Just one other just quick follow-up question here. The technology initiatives you're doing, is any of that on pricing and underwriting or is it all more agency and price productivity?
On the technology initiatives, we've made a significant investment in our data infrastructure, our products, obviously manifesting ultimately with a new set of products in the marketplace. We've launched a series of new digital capabilities for both our agents and our customers that will drive efficiency not only from a customer experience and agent experience, but also from an expense efficiency perspective. Very much so, you know, targeted on those two end market capabilities. I don't know, Brad, you want to add any context?
You know, Brian, also just investments across the organization on process improvements, and making things, you know, making work easier day-to-day for our individuals so that we have more time, you know, doing less of the blocking and tackling and more time analyzing so we can see around the corner. We're seeing some scalability and efficiencies there. We've also moved almost our entire infrastructure to the cloud. That's been, you know, very helpful with security and other things as well as app dev changes, et cetera.
Great. Thank you.
There are no further questions at this time. I will now turn the call back over to Tom Evans for closing remarks. Tom?
Thank you. Thanks again to everyone for joining us today and for your continued interest in Kemper. As we noted, we remain focused on executing against our priorities, improving performance, and positioning the company for success. As always, we appreciate your time and support, and we look forward to updating you on our progress next quarter. Stay well.
This concludes today's call. Thank you for attending. You may now disconnect.