Good morning, ladies and gentlemen, welcome to Kemper's first quarter 2014 earnings conference call. My name is Nova, I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, instructions will follow at that time. As a reminder, this conference is being recorded for replay purposes. I would now like to introduce your host for today's conference, Ms. Diana Hickert-Hill, Vice President, Investor Relations and Corporate Identity. Ms. Hickert-Hill, you may begin.
Thank you, operator. Good morning, everyone, thank you for joining us. This morning, you will hear from three of our business executives, starting with Don Southwell, Kemper's Chairman, President, and Chief Executive Officer, followed by Denise Lynch, Kemper's Property and Casualty Group Executive, Frank Sodaro, Kemper's Senior Vice President and Chief Financial Officer. We will make a few opening remarks to provide context around our first quarter results. We will open up the call for a question-and-answer session. During this interactive portion of the call, our presenters will be joined by John Boschelli, Kemper's Vice President and Chief Investment Officer, Ed Konar, Kemper's Life and Health Group Executive. After the markets closed yesterday, we issued our press release and financial supplement. In addition, we have filed our Form 10-Q with the SEC, you can find these documents on the investors section of our website, kemper.com.
Please note that our discussion today may contain forward-looking statements. Our actual results may differ materially from these statements. For information on potential risks associated with relying on forward-looking statements, please refer to our Form 10-K filed with the SEC on February 14th, 2014, as well as our first quarter 2014 Form 10-Q and earnings release. This morning's discussion includes non-GAAP financial measures that we believe may be meaningful to investors. In our supplement and earnings release, we have defined and reconciled non-GAAP financial measures to GAAP where required in accordance with SEC rules. Finally, all comparative references will be to the first quarter of 2013 unless we state otherwise. Now I will turn the call over to Don Southwell.
Thank you, Diana. Good morning, everyone, thanks for your interest in Kemper. Today, I'll discuss our overall results for the quarter, including a few specifics on the life and health segment and on our investment performance. Denise will provide more insight on our property and casualty segment results. Frank will review details on our financials, capital, and liquidity. I'll finish up with some closing comments before we'll go into the question-and-answer period. We'll start with the total view. We made progress in some areas and were challenged in others. We delivered $35 million in net income in the quarter, which was down from $58 million. Net operating income was $32 million versus $42 million, a decline of $10 million. We'll go into the details shortly, but keep in mind that we expect to see some quarter-to-quarter earnings volatility as we navigate our path to improve profitability.
Our property and casualty segment realigned its businesses and continued to make progress on its profit improvement actions despite a difficult quarter. Denise will provide more information in a moment. Turning to our life and health segment, earnings were up 4% in the quarter, delivering $22 million in net operating income. For the Kemper Home Service Companies, benefits returned to a more normal level after ticking up in the first quarter of 2013. The life and health segment continued its expansion efforts related to our three new growth initiatives. The first is our Kemper Senior Solutions business, which offers life and home healthcare products through independent agents and brokers. The second is our Kemper Benefits business, which offers voluntary worksite supplemental health products through employers to their employees. Kemper Dental offers dental products to employees of small businesses.
We remain pleased with the market interest to date in these new businesses. Turning now to investments. The portfolio delivered another quarter of good results. Net investment income was down from last year when our equity method investments performed exceptionally well. This year, they were more normal. From a total return standpoint, it was an outstanding quarter as we were rewarded for staying fully invested in the market. Due to the continued challenging interest rate environment, recently we have been putting a majority of our new money in lower investment grade municipal and corporate bonds, along with private higher-yielding investments. However, we do not expect a material change in our overall non-investment-grade fixed income allocation. I'll turn the call over to Denise.
Thanks, Don. Before I walk through the results, I'd like to discuss the recent changes we made to the property and casualty organization, since they affect how we report our results. In mid-March, we implemented a realignment of the former preferred specialty and direct businesses into one property and casualty segment. The new property and casualty segment allows us to share best practices where appropriate, invest in new capabilities, and offset some of the expense ratio pressure from earned premium declines. I'm pleased to report that we have received consistently positive feedback from our agents regarding our new structure. Our agents recognize the opportunity this realignment presents for them and for us by extending access to our full suite of products through cross-appointing where appropriate.
In fact, more than 200 cross-appointment opportunities are in the pipeline as a result of this realignment. The realignment is allowing us to double our predictive analytics team to support our Kemper personal and commercial lines business. We've also formalized a project management team, created a new strategy function, and invested in an organizational effectiveness team. We are looking forward to benefiting from the opportunities the new realignment creates for our property and casualty segment. Turning to results for the quarter. We delivered net operating income of $14 million in the quarter, down from $29 million. We have several areas of progress, particularly in improved rate adequacy and the performance of our direct-to-consumer books during the runoff phase. The catastrophe and non-catastrophe weather losses and premium decline made this a disappointing quarter.
The top line was pressured as we delivered $304 million in net written premium, down from $345 million. While softening market conditions and the effect of our deliberate actions to reduce catastrophe exposures, reduce volatility from non-catastrophe weather, increase package writings, and improve the overall quality of the book of business resulted in lower new sales volume and retention. We are focused on improving both new sales and retention throughout 2014 by, one, engaging existing agents to increase new business sales. Two, increasing new business through appointing new agents and cross-appointing agents with both preferred and non-standard product access where appropriate. Three, increasing hit ratio and price adequacy through improved rate segmentation. Four, improving the agent experience as they write new and renewal business with us. Turning to profitability, the combined ratio of 99.5% was up 3.7 points.
The decline in earned premiums contributed to the expense ratio increasing by 2 points, despite lower overall expenses on a year-over-year basis. The loss in LAE ratio was up 1.7 points, largely from increased catastrophe losses. The underlying loss in LAE ratio was relatively flat, as higher than normal large losses and weather-related losses were offset by higher average earned premiums. Looking at personal auto in more detail, our net premium written were $208 million and earned premium were $216 million. Personal auto experienced a higher level of favorable development, primarily from the previous accident year. The underlying loss in LAE ratio improved just above a half a point, with average earned premium increasing 5%. Our recent personal auto loss trends are mostly consistent with the industry. In the last year, bodily injury frequencies have declined favorable to the industry, while bodily injury severities have increased consistent with the industry.
Property damage and collision loss costs have escalated consistent with the industry trends. In the aggregate, pure premium trends are increasing by low single digits. In commercial auto, net premium written was $14 million. The underlying loss and LAE ratio deteriorated 7 points, primarily from a higher frequency in all coverages except bodily injury. This remains an area of focus as we improve underlying profitability in this line of business. In homeowners, net premium written was $71 million. Homeowners experienced an increase in catastrophes and a lower level of favorable reserve development. The underlying loss in LAE ratio deteriorated 1 point, primarily from an increase in losses from large fires. While not a good quarter for homeowners, we are pleased with the continued progress we are making through disciplined underwriting actions and improved average earned premium, which is up 12.3%.
Looking at our overall performance, there are areas of good progress and issues to address. We feel good about, one, our continued progress toward underwriting risk quality, price adequacy, and average earned premium increases. Two, the realignment of the property and casualty segment. Three, the effectiveness of the direct-to-consumer book. We are acting with focus and urgency to improve new business production and retention while not compromising our commitment to improve profitability. While we expect continued pressure on the top line, we anticipate premiums to stabilize later in the year. Overall, the changes we are implementing are refinements to drive improvement in P&C performance over time, and we look forward to our realigned organization bringing increased value and efficiency to the agents and policyholders we serve. Now, I'll turn the call over to Frank.
Thanks, Denise, good morning, everyone. Today, I'll cover Kemper's overall first quarter performance, capital, and parent company liquidity. We delivered net income of $35 million, or $0.63 per diluted share, compared to $58 million or $1 per diluted share. Results included $4 million of after-tax net investment gains in the current quarter, compared to $16 million. Our net operating income was $32 million or $0.56 per share for the quarter, compared to $42 million or $0.72 per share. Total revenues were $555 million for the quarter, a decrease of $61 million due to lower property and casualty earned premiums, fewer net investment gains, and lower net investment income. Earned premiums declined $32 million, with nearly all of the decrease stemming from personal auto. Our property and casualty earned premium decrease was more than we expected, and we are implementing the actions to improve performance.
Consolidated pre-tax net investment income was $71 million in the quarter, a decrease of $10 million, driven by lower equity method investment income and lower yields. Equity method investments earned $4 million compared to $9 million, which was better than expected last year. The first quarter annualized pre-tax equivalent book yield on average invested assets was 5%, down about 85 basis points from last year. Our pre-tax equivalent average investment-grade fixed maturity reinvestment rate increased about 45 basis points sequentially to about 4.5%. I'll discuss the financial results of each of our businesses, starting with property and casualty. The property and casualty insurance segment reported net operating income of $14 million for the quarter, down from $29 million last year. Overall, our property and casualty combined ratio increased nearly four points to 99.5% for the quarter due to higher catastrophe and weather-related losses.
The underlying loss and LAE ratio was essentially flat at 71.4% as improvement in personal auto offset increases in commercial auto, homeowners, and other personal insurance. Insurance expenses as a percentage of earned premiums increased two points to 27.8%, driven by the lower premium base. The property and casualty segment benefited from $15 million of favorable reserve development in the quarter, up $2 million. Total catastrophe losses were $16 million, up $7 million. Earned premiums were $322 million in the quarter, down $30 million, as a lower number of auto policies in force was partially offset by higher overall premium rates. The continuing runoff of our direct-to-consumer book was approximately 25% of the drop in earned premium. In total, property and casualty premium retention was 77.5% compared to 80.6%. I will shift now to the life and health segment.
Net operating income was $22 million in the quarter, an increase of $1 million from last year. Earned premiums and net investment income decreased slightly in the quarter to $155 million and $50 million, respectively. Total expenses were down $2 million pre-tax as lower home service agent commissions and legal costs were partially offset by higher startup costs related to our new growth initiatives. I will now cover book value, capital, and parent company liquidity. Book value per share was $38.71 at the end of the quarter, up 5% or $1.85 from year-end, driven primarily by the impact of lower market yields on the value of our fixed maturity portfolio. Book value per share excluding unrealized gains on fixed maturities was $35.13, up 2% from year-end.
Statutory surplus levels in our insurance companies remain strong, we estimate that we will end the year with risk-based capital ratios of approximately 415% for our life and health group and 360% for our property and casualty group. On May 1st, the property and casualty group paid a dividend of $100 million to the holding company, its first dividend in more than two years. The excess capital position of our P&C companies was largely attributed to improved results and lower levels of premium, including the direct-to-consumer runoff. We expect to continue to build excess capital in our P&C operations throughout the year. However, we are not expecting the P&C segment to pay any additional dividends in 2014. We plan for the life and health group to pay a dividend of about $80 million in the second half of the year. Turning to liquidity.
In the first quarter, Kemper issued $150 million of 40-year subordinated hybrid debt with a 7.375% coupon. We anticipate using the net proceeds for working capital and general corporate purposes, including retirement of a portion of the company's debt. Given our capital needs at this time, we anticipate retiring our $250 million outstanding debt at its November 15 maturity with parent company cash as we look to reduce our overall debt outstanding closer to historic levels over the long term. At the end of the quarter, the parent company held cash and investments of about $255 million, and our $225 million revolving credit line remained undrawn. Now I'll turn the call back over to Don.
Thank you, Frank and Denise. As you just heard, our capital position strengthened even further. Our long-term capital deployment priorities continue to include, 1, funding profitable organic growth, 2, strategic acquisitions, and 3, returning capital to shareholders, both through share repurchases and dividends. We remain focused on achieving improved profitability. While we are selectively funding organic growth in some areas, in total, premium revenues are expected to decline in 2014, organic growth will not use capital this year. Regarding acquisitions, we routinely evaluate opportunities and are keeping some powder dry. On returning capital to shareholders, we maintained our competitive dividend and continued to repurchase shares when the volume and price met our 10b5-1 plan criteria. In the first quarter, we repurchased $8 million worth of common stock.
Given the recent debt offering, the dividend from the property and casualty segment, and the softer new business, we have a higher level of capital and cash at parent than we typically hold. This creates flexibility, it also creates challenges to the denominator of the ROE. The path we've outlined to achieve a double-digit ROE has four main elements. 1, continued improvement in our property and casualty combined ratio. 2, normalized catastrophe losses. 3, increases in interest rates consistent with the Federal Reserve baseline scenario. 4, full deployment of available capital. Our first quarter property and casualty results alter our expected trajectory somewhat. However, we are confident that our property and casualty results will improve. Catastrophes will be a volatile but manageable risk. Interest rates dropped in the quarter, we expect that interest rates will rise.
Effectively deploying our capital when the right opportunities arise will be critical. It's possible that achieving a double-digit ROE run rate could be delayed beyond the fourth quarter of next year, but we still have a good shot at hitting that target. We remain committed to delivering, and we are optimistic about our long-term prospects. With that, I'll turn the call back over to the operator so we may take your questions. Operator?
Thank you. At this time, if you have a question, please press star then one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. One moment while we wait for callers to queue up. Again, if you have a question, please press star then one on your touch-tone telephone. Our first question comes from the line of Steven Schwartz of Raymond James. Your line is open.
Thank you. Good morning, everybody. Frank, can we start off with capital a little bit? I got a little bit lost. How much is at the holding company now?
There's $255 million of cash and short-term investments at the holding company right now. That does not include the $100 million dividend that was paid on May 1st from P&C.
Okay. That was important. I didn't get that. Did that include the debt offering?
Yes.
Okay. That's what I wanted to make sure. Okay.
Okay.
With the debt offering. Okay. On to some other things, if I may. Reinsurance changes this year, did that have any effect on premiums earned this quarter? I know that it did have a big effect on 2013.
Steven, I think our reinsurance buy was about $10 million less than the prior year. We'll check on that number, but I think that's close. If you look at the quarter, hold on just a sec. Reinsurance buy was a $5.3 million decrease. We took advantage of some of the rate reduction to buy a little more. Net premium earned, would you take about a quarter of that? It should be the impact on the quarter.
Okay, not that big of a deal. Okay. The premium growth slowing in 2014, there was that comment. That was a reference to just the P&C? I guess I'm kind of wondering when you might think that the new efforts at Kemper Dental, the brokerage might actually show up in the top line.
Thanks, Steven. Let me ask Ed Konar to give us his views on that.
Morning, Steve. Some of those businesses are pretty new. The one that's been around the longest is Senior Solutions, which is selling life insurance and home healthcare, health insurance. That business is generating, I think it's sold approximately $16 million of annualized premium to date. Sales are still going pretty well. The Kemper Benefits division is more in its infancy, and I think there's a few million dollars of annualized premium on the book, but that's ramping up as we go. The Kemper Dental is pretty small at this point. The 2014 impact of all those businesses together, probably in the $20 million earned premium range.
Okay, great. Frank, one more if I may. Would you have an estimate, I don't know if you guys do this or not, but would you have an estimate for RBC for the life companies for the end of the quarter?
I have the end-of-the-year projection at $415 million. I don't have the end-of-the-quarter estimate handy right now. We ended the year at about $430 million.
Okay.
On the life side.
Okay, great. Thank you, guys.
Okay.
Again, if you have a question, please press star then one on your touch-tone telephone. One moment. I'm showing no further questions. Thank you. I'll turn the program back to management for closing remarks.
Thank you, operator. I do have just a few closing remarks. In the first quarter, we did make progress in some areas, and we were challenged in others. Our life and health segment had a solid performance. Our property and casualty segment made improvements in some areas and is implementing actions to deliver the overall results that we seek. Our investment portfolio had another good quarter. We do remain committed to delivering shareholder returns, the kind of shareholder returns that we all seek. Thank you for your time this morning. We'll update you again on our next call.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect.