Good afternoon. I'm Greg Peters. I'm the analyst covering insurance for Raymond James. Pleased to introduce our last presenter for day one of the 44th Annual Institutional Investors Conference for Raymond James. Honored to welcome back Kemper, who's been participating in our conference for several years now. First to begin with, from management, we have Joe Lacher , who's CEO, James McKinney, who serves as CFO, and last but certainly not least, would be Karen Guerra, who serves as the investor relations officer. For all those listening in and sitting here in the room, you know, follow-up questions can be emailed directly to Karen or myself. Today's format, it's a 30-minute presentation. We're gonna conduct it as a fireside chat, just asking questions.
There will be a breakout session afterwards downstairs, where there'll be another informal 30 minutes of Q&A, if needed. With that, I thought I'd start off with Joe and Jim, just a sort of a state of the union on the market in Kemper. The auto insurance market has been going through a lot of stress in the last 18 months. With inflation, a lot of companies reporting very high combined ratios in auto in particular. Probably a good point for you guys to start on giving your perspective on the market and how Kemper's performed to date.
Yeah. Greg, thanks for the question. This is Joe. Thank you again for having us and hosting the conference. Thrilled to be here. Clearly the results when we look back on the last, you know, 18 months, 2 years, the pandemic reopening, has been a challenge. We have certainly not been immune to the inflationary environments, in the auto world or the mortality issues around the pandemic. In some ways, I feel like we've been pressured maybe more, more than others. It's been an acute issue for us and been the top of our attention.
You know, we look at it and say, from a life side of the house, we are largely seeing mortality move back towards pre-pandemic levels and are feeling really good about how that business is performing and operating. Our auto franchise, similarly is showing all the signs of moving briskly into a recovery phase. We've applied a lot of non-rate actions, a lot of rate actions. Many of those are in the system, but just haven't fully earned in yet.
Right.
You know, what makes us feel pretty good about that is much like the analogy I use all the time is a kid with strep throat. Once you start the antibiotics, you know, in a day and a half or 2 days, they're gonna be feeling better. You know, several doses of antibiotics have been injected into the system, and we're starting to see those, you know, work their way through. Very much excited about flipping the calendar page to 2023 and anticipating an environment that will still be an industry challenge for some period of time and a hard market, particularly from an auto perspective for a period of time, but looking to be on the positive side of that over the course of this year.
Yeah. It's certainly reflected in your guidance that you offered the street where you expected profitability in the first half and then underwriting profitability in the second half. Maybe let's pick apart the pieces and first focus on specialty auto and the specialty business. Talk to us about, you know, you're more than just one state. Talk to us about the different states, where you are with the rate process and sort of, you know, give us an update, because I'm sure certain states you're further ahead than others.
Sure. You know, I'll start, and we can tag team this. You know, I might encourage you to think about us, maybe in 3 buckets.
Okay.
There's California, there's Texas and Florida, and there's sort of all other.
Mm-hmm.
In the ex-California environment, we've seen north of 50 and 60 points a rate applied into the system. When you look at the business in each of those states, the other than California, Texas, and Florida, they're a small enough portion of the book, and there's been enough rate applied that that's not actually what's driving what's going on inside the organization. We've seen in Texas and Florida the capacity to have a lot of rate filed, to have the states approve a lot of rate, to have a lot moving through the system. Those candidly are probably the places that needed the most rate for us. We have been growing them fairly rapidly pre-pandemic. We'd had a strategic desire to be doing that.
They had a little bit more of a temperature starting in the process, so they needed it. They've seen that rate coming through. I think we've made the comment that they either they are or they're approaching rate adequacy in terms of what we're doing. California has been slower to see filed rate come through. We've had filed and had approved at the back end of last year, a 6.9% rate increase, so we felt good about that. We've got another set of fairly significant filings sitting in the department right now. That the good news is the department is very thoughtfully asking questions, engaging and moving forward on a normal ordinary course with those rate filings.
We're cautiously optimistic that those will continue to move forward through ordinary course, and hopefully sometime in the middle of this year, we'll see those come into play in the marketplace.
The California piece or component has certainly gotten a lot of attention, especially considering the shift in your approach, where traditionally rate increases were held to a 6.9% threshold. You had that first round approved, but now you've come back for the second bite at the apple, something substantially more than 6.9%. Talk to us about why. Obviously, it's needed, but talk to us why the dynamics are such that you think you'll have some success in getting the regulators to consider that versus going at it with 6.9 till you get to the rate adequacy?
Yeah, it's a great question. I understand it's a little out of pattern from what most of us have historically done. If you probably asked me two years ago, I wouldn't have anticipated moving this way. I think it's the result of a unique set of situations and circumstances. There's been a very clear increase in loss trend and loss inflation-
Mm-hmm.
that's run through the environment. I think that as the insurance department looks at the, what's going on in the California insurance marketplace right now, they see that there's, you know, in fact, a need for businesses to see significant rate increases.
Yeah.
come through. We very much believe as we work through our rate filings that they support that kind of rate action. We've gotten indications from the insurance department that they recognize this unique environment and need and guidance from them to a chunk of the industry. You know, we've heard it through trade associations, we've heard it through other groups, that they're open to rate filings more akin to somebody's rate need rather than.
Yeah.
Going one at a time. Even some suggestion that there's a willingness, you know, to sort of operate outside of their normal ordinary course. We're listening to that feedback. We definitely know that, you know, we're in a specialty auto business. We've got a very heavy concentration of business in certain pockets of California that become, you know, important to keeping that market functioning.
Right.
We're cautiously optimistic that there'll be a meeting of the minds.
Well, your messaging isn't necessarily dissimilar from what we're hearing from others in terms of a seeming shift in the attitudes of the insurance department in California in willingness to accept and contemplate additional rate approval. Certainly seems like there's a positive shift for that state. Maybe, you know, switching sides and still sticking on specialty, as you're applying the rate, then retention becomes an important variable because, you know, theoretically, if you're applying rate and the rest of the market isn't or they are, your retention, you can have changes in retention. Maybe speak to the disruption of the book of business as you're applying this rate. Is there more normal, more than normal disruption? Maybe speak, you know, spend a couple minutes on that topic.
I think it's important to segment kind of our actions in terms of the impact that they'd have because I think it provides clarity in terms of the outcome. When you look at kind of our book, if we split it between new and renewal.
Mm-hmm.
As you go through, what we're actually seeing is those retention rates, even in areas where we have 50, 60 points of rate that are working in, that those rates of retention are still going up. While maybe not as fast as what you had seen kind of, you know, during some of the heights of the pandemic, that retention element continues to kind of move forward, and we find that attractive. I think that's a good indication of just how hard and how tight the markets are and the recognition of just the severity increases that came through, right? I mean, you had more than 60% used car prices in kind of a 2-year period. I think people are aware and following and going through, and I think everyone's in the same bucket.
As it relates to the new, we've been Right, you've seen some of our unit count not go down there as we've effectively provided and applied more and more filters, right? Gotten to a very high level of confidence with what we allow to come into the door as being profitable and working through this environment. As we have rate that comes in that we've spoken about, there's the opportunity for us to widen that filter a little bit at the appropriate times with the right margin of safeties to navigate this environment. That will effectively, I think, come in and provide a nice opportunity for a very attractive book and a growth book over the longer term that comes in.
Long way of saying, I think we're pretty bullish about the retention of kind of the book that we're seeing just because as we've watched it kind of work through other markets and other areas, we just haven't really seen a lot of dislocation associated with that renewal pricing because I think it's pretty market standard at this point.
Yeah. The normal or traditional elasticity models aren't functioning.
Yeah.
We're not anticipating that they are. We're seeing PIF count be more impacted, as Jim said, by the underwriting filters on our new business than rate action disrupting in the marketplace.
Yeah. That's a pretty stunning comment, right? If you're able to raise rates as much as 50% and still not see disruptive changes in retention rates.
Yeah, this is really where you see the unit count difference on it is largely related to, again, those filters.
Yeah.
Us essentially, you know, kind of given the environment, current rate conditions, things of that nature, it just doesn't hit a confidence interval yet, for us to think that that's the right decision to allow it to come into the book.
Yeah.
It's that versus, to your point, that renewal component.
The, you know, the, this, Fireside Chat is meant to be interactive. If you have any questions in the audience. Yeah, go ahead, Sean.
Can you talk about what happened to capacity in the two or three years in California that they weren't allowing for business such that maybe that's the answer to the original question?
So-
Did a lot leave the state, and, is there more market share for you going forward?
Sure. I'm gonna repeat the question, for folks on the webcast. Can we talk about what happened to capacity in the California marketplace during the couple of years that we've seen, and then have carriers left the market or what's happened, and what does that bode for future market share opportunities? The market availability has constricted over that time period. I'll give you a stat that we sort of use to watch it. We'll look at comparative rater data. On any given quote, pre-pandemic, you might have seen 70%, 80%, 85% of quotes would've had, you know, carriers returning a rate. It, or it dropped to 40.
You know, the measure actually is showing a very significant decrease in the number of times individual carriers were choosing to return a rate. What I might, you know, liken it to to some degree is, you know, if you've gone into a grocery store recently and you go to the bread aisle, there's a whole lot of different vendors, and there's a whole lot of different types of bread. You know, at some point, two or three of them can disappear, and you just don't notice it. You know, at some point, if all you're left is Wonder Bread, you still have bread, you can still make a sandwich, but your choices are way down. We were getting close to, in some segments of the market, in some classes, very small numbers of choices.
It may not have broken the market yet, but, depending on who you were as a consumer, you might have felt unsatisfied with it. Where I think we're gonna see opportunities is typically in a, in a hard market, in a personal line space, what happens is the faster you fix your profitability issues, the faster you can go back to what Jim said a moment ago, and you can reopen your underwriting filters and allow business to come in. You can put your bread back on the shelves, and be there for the sales.
We're reasonably optimistic, particularly in the space of the competitors we're dealing with every day, not the entire competitive universe in auto in the country, but in the geographies, in the specialty auto space, that we believe will be back in the bread aisle faster than most of them. We would hope that we see an opportunity, not in the first half of this year, 'cause we are gonna absolutely 100% get a higher confidence interval, that we're at our target margins. I would expect there's an opportunity, when we hit that confidence interval.
Sticking on California, and can you speak to the commercial auto business? Because you're not seeing the same type of inflationary pressures and impact on those results that we've seen in the personal auto. Is there a different pricing dynamic going on there?
Maybe I can broaden the lens.
Yeah.
-from California-
Yeah.
just to commercial vehicle in general. Those cars and trucks drive on the same roads that the personal and, you know, the carriers do, and they go to the same body shops.
Right.
and use the same metal. The inflationary pressures there, we're just not under the same regulatory constraints of how the pricing has to respond. We've been able to adjust more briskly around that. We are focused in our commercial vehicle business very much around customers that are analogous and parallel to our specialty auto business.
Yeah.
We're not dealing with large fleets of long-haul truckers. We're dealing much more likely with artisan contractors and smaller vehicles. Customers, the profile of that owner would be much more analogous to the profile of our specialty auto customer, or they're coming through the similar distribution channels.
Right.
We're using similar levels of capabilities and sophistication in terms of how we handle the pricing, plus some additional things we use in commercial vehicle that help us achieve a superior underwriting result there that's, I think, out of pattern with most of the commercial auto business in the industry. Do you have anything else?
No. I think it's just a good opportunity to see kind of our core competency from an underwriting perspective. When we're able to kind of balance those trades out, the success that we can have with that, and that's one of the components you can look at and say, "Well, what's different or unique about kind of the timing associated with sometimes you gotta wait on and work with the regulators not to move at a certain pace." This kind of highlights that we didn't have a change in our fundamental competencies. This is more just a product of the environment, working that through.
That makes sense. Actually that is it provides some confidence that you'll get the pricing right when the regulators approve it on the other side of the house. One of the, in one of the other presentations today, they ran through the here's our result, then here's all the impact of the rate change that's in the system. There was an arrow, a negative arrow saying increase in loss costs or inflation factors this year, unknown. What's your view on inflation factors this year? 'Cause, you know, at the beginning of 2022, we didn't see what happened at the back half of 2022. Give us some perspective on what your view on inflation factors are the beginning for 2023, here at the beginning of 2023.
Yeah. I think I would point you to some of the things that you can see from a rate filing perspective on our end that really incorporates kind of our thoughts on forward trend. Inside of those, you'll see kind of mid to high single digit expectations depending on kind of market and certain, you know, characteristics associated with what we might be writing in those markets and how we think it might interplay.
Mm-hmm.
Obviously, that's different than what we were seeing, you know, from a 22 standpoint. It's not negative though, it's moderating, right? While folks have been excited that there might be some pullback, that's not our general disposition to this. We continue to look at and believe and have for as long as I mean, almost 2 years believe that you would not see kind of a pullback in used car prices or other elements, you know, significantly, you know, at least for the first half of this year, and if not likely longer.
We continue to kind of indicate that we thought for various different reasons, labor rates, body shop rates, and things like that, while they might get disconnected at different points in time, you might see one component of the loss cost trend coming through, you know, this quarter, that next quarter, it would trail. That as a whole, you would continue to kind of see these things move in tandem over time. That if you look at the whole bucket, that that will be more indicative of what will be the likely outcome than any single factor. That seems to be playing through at this stage.
I think given that we're constantly in the market, constantly filing, right, for new rate in this case, and that the fact that you should probably take a little bit of comfort in the sense that you don't see us fundamentally changing those to say 10 or 15 or 5 if we're filing with what we think is the forward trend in our expectations. Very similar to kind of where we ended the year, if you look at our filings in terms of how we at least at this stage believe is going to play through.
Okay.
We operate. If I can add one more. I think we operate with that, say, high single-digit view, and we are always thinking 18 to 24 months out when we're working pricing. Where I might agree with that other company that there's some unknown. If you look out one quarter or two quarters, there may be some volatility in that, and there's gonna be, and we recognize that, and we have that same unknown.
Yeah.
bracket around it. We're operating from a pricing perspective exactly the way Jim described it, and we're thinking about as we're managing ourselves through this part of the cycle, that we're going to get to our target profitability with a very high degree of confidence before we open up that funnel on the growth or the market share comment that was asked before, because there might be a little volatility around that.
Makes sense. Go ahead.
A bit of a story, so forgive me for that. Somewhat on that question, a small question. Outside of the inflation issues that you're seeing outside, since the pandemic, have the actual numbers of claims increased? The reason I ask that, we all know about crime issues in major cities. Do you see any sort of increase or whether the actual numbers of claims have increased, or it's just an inflation issue?
Sure. Sure. I'm gonna repeat the question again for folks on the webcast. The question was around, you know, throughout the pandemic, we know there's been inflation, but the question was have the quantity of claims increased, particularly when thinking about crime in urban areas or other things? Have been there other causes of loss that have had an uptick? I'm gonna unpack it a couple of different ways. The earliest part of the pandemic with lockdowns occurring broadly saw frequency go down.
We did not see our specialty auto frequency go down as much as some standard and preferred auto players did, largely because a good chunk of our customer base wasn't able to work remotely, and they might have been essential workers, and they might have been continuing to work, so they were still on the road. You got some of the frequency decline 'cause there were fewer cars on the road, so there were fewer accidents, but they were still out and about, so you didn't get quite as much of a benefit. When folks started to drive, we saw that frequency come back up. One of the things we've been disclosing fairly regularly for some time is our frequency relative to 2019 levels for us.
Part of the reason we've been disclosing that, our frequency levels are below the 2019 level. That is a proof point for investors that our underwriting is actually working. When we take non-rate actions and we are tightening the underwriting funnel, we're knocking out the higher frequency items and keeping the lower frequency items. You can see that that's actually in fact happening. I wanted to do that commercial before I fully answered your question. Sorry, I've got the mic. Underneath it, when we actually look at the cause of loss, we're not seeing, you know, huge upticks that where we would say it's way outside of a pricing thought process from things that might be a crime in an urban area.
There is some uptick in comprehensive claims that is not insignificant, but it's not what's driving the overall story here. This is a broad inflation story. There is some mix in causal loss, there's some mix in time of day, there's some mix in accident speeds. It's sort of a world readjusting. Again, it's not zero, but it's not a significant driver.
In the remaining 7 minutes here, kind of touch on the preferred business. I understand you've announced that there's a strategic review going on, but I'm not asking for you to announce here to our investors what your intentions are of the strategic review, but give us sort of your view, you know, as of the end of the year on how the preferred business is performing and the opportunity to improve that, you know, in the near term.
Yeah. I'll adjust the question slightly, Greg, if I can. We look at every one of the franchises inside of our business and say, "Okay, how does it have a clearly defined market, a place where we believe that we're meeting customer needs better than our competition, and we can have over the long term, a systematic, sustainable competitive advantage?" We very much believe we have that in our life insurance business and our specialty auto business. We believe we've demonstrated that. We can go through all the capabilities and customer needs and how we match that. For some period of time, we've acknowledged that in our preferred business we've been struggling to find that exact match. At its core, it targets preferred auto and home customers. There's lots of carriers out there that do that.
If we do it the same way everybody else is doing it, we don't have enough scale, we don't have enough data to drive a pricing sophistication, we don't have a differentiated offering. We've been working to find either a geographic focus or a customer segment focus or a product focus that would allow us to meet that standard. What we've concluded, the reason we put the business into that strategic review is to acknowledge, hey, the two or three things we've tried haven't been where we want them, and we gotta go through a deeper thought process.
We could look at short-term results, and I could feel good about those or not good about those, but I think the bigger issue is we're starting at first principles of how do we look at customers, how do we look at capabilities, how do we look at the long-term ability to go with. Regardless of what we have in any quarter or two quarters or three quarters, it's gotta fit that picture. That's what we're really going back and doing soul searching about. We'll, in relatively short order, have some point of view on the answer and the output.
Yeah. Just building off of what Joe said there, I'll add on maybe to the profitability component. you know, we provided some rationale or the thoughts in terms of how you might think about it. Similar to our other business, you know, it has a little bit of a difference relative to the mix. When we think about the first half, while we're improving, you're gonna largely probably see it kind of holding serve in terms of the results that it have. You'll see more improvement in the back half. The reason for that is just some of the differences between the auto and the home, just for how some of the inflation elements work and play their way through.
If you were to take that back to the summary, in addition to the comments that Joe made, it would be, you know, kind of hold serve for the first half is our baseline expectation. You can think up or down from there. Then, you know, more material improvement in the second half, and things remain on pace with those statements.
Well, we only have a couple minutes left. You mentioned the life business. I think we should clean up with some comments on the life business, and then capital. You know, hit those two major buckets, and then we'll wrap up.
I'll do a fast version on life and let you do a fast version on capital. Our life franchise is a terrific business. It targets low face amount life insurance, plain vanilla whole life insurance for low to moderate income individuals. These customers have very similar basic characteristics to our specialty auto franchise. They're very price sensitive. They're buying for religious, social, cultural reasons. They want a dignity of an end of life. They're economically challenged in some ways, but they actually are very much looking for somebody to help provide the discipline to provide what was really an emotionally important element for them. We have an underwriting advantage, an underwriting knowledge, a customer intimacy of how they buy, how they shop, what the mortality looks like, how attrition rates work.
We have an underlying, more than 2,000 employee captive agent sales force that interacts with those customers every day. It really is the definition of a systematic, sustainable competitive advantage. Even over the course of a pandemic, which was a 1 in 200 year mortality-based event, the business, you know, averaged more than $100 million a year in distributable cash flow. It's an attractive business that sometimes people miss, when they think about the business overall, and they're thinking about just specialty auto.
It really is a strong benefit to us and a great capital diversifier, which actually helps us lower our cost of capital, which provides pricing power to both our specialty auto business and our life business, which might be the perfect way to pass off the capital.
You know, we continue to be in an advantageous position from a capital position. As I think folks, if you spend a little time, would know in looking at us, part of the reason we're in our analytics and things of that nature said that this environment was coming, we got in front of it and raised a bunch of capital in advance of the environment occurring to help ensure we both had the right kind of flexibility in that to navigate, to build on our core capabilities and that as we went through. In addition to that, to be in a catcher's mitt position, as things go out, to grow the business at the right time once we have the margin of safety. That continues to be the case. We continue to unlock significant components of capital.
As our third and fourth quarter highlighted, we'll be able to unlock, in addition to the normal capital that Joe highlighted from the life, we expect to have another $100 million that will be unlocked this year through that business and some of the things that we're doing with Bermuda 2.0. On top of that, we have $500 million basically at the hold co, plus another, you know, $800 million available to us through liquidity lines and things of that nature.
Unless there's a tremendous update, where we need more than $1.3 billion or $1.5 billion in capital, we feel like we're in a pretty good spot, you know, as we navigate and go forward to continue to make the right investments and to really grow the business in a, in a thoughtful way, when the time is right.
Well, we've hit the 30-minute mark, you know, Godspeed in spending the excess capital that you have. We're having a breakout. I should tell everyone, very happy that you joined us because I do know you're having an investor day on Thursday in New York City, I'm sure there'll more wonderful things to say about your company then. Thank you for your presentation, we'll go to breakout now. Thank you.
Thank you.
Thank you very much, Greg. Appreciate it.
Appreciate it.