Kemper Corporation (KMPR) Earnings Call Transcript & Summary

Okay. Good afternoon, everyone. Thanks for joining for our next session. In the next 45 minutes, we're privileged to be joined by members of Kemper's leadership team, including Joe Lacher, Director and CEO; Jim McKinney, CFO; as well as Christine Patrick, who's the Head of IR. For those who might not be familiar with Kemper, a $4 billion market cap insurer, producing about $5 billion in revenues in 2019. Kemper operates 3 business segments, which include preferred auto and homeowners, specialty auto and life and health. Personal auto premiums represent about 2/3 of total revenues now, a percentage that's increased over the last couple of years reflecting double-digit growth and M&A activity in nonstandard auto market as part of the company's strategic refocusing that began in 2016. Before we jump into the session, for those listening or watching, if you have questions to the team here, please shoot me an e-mail at [email protected]. So Seth, S-E-T-H, dot Rosenberg, R-O-S-E-N-B-E-R-G, @ubs.com, and I'll compile those for the end of the session.

So let's jump in. So Joe, thanks for joining us. Maybe let's start with an update on the strategic road map, where you guys are relative to the plans you laid out in 2016. And what are some of the key milestones you're focused on over the next 12 to 24 months? And of course, how has COVID and the current pandemic impacted that?

Yes. Thanks, Seth, and thanks for having us. And for all the investors listening in, we very much appreciate your time and interest today. Try to jump right into those thoughts. We laid out a picture in 2016 which is really trying to describe what the organization foundationally was and was going to become. We're a portfolio of specialty businesses, where we use these businesses and focus on them to have systematic, sustainable competitive advantages, where we can meet a customer need in a way that delivers exceptional value to them and do it in a way, because of that competitive advantage, that's going to let us produce an appropriate return and an outsized growth in that marketplace because we're beating our competition and delivering that need for customers. In 2016, we saw that we had a portfolio of businesses that we thought had the ability to achieve those competitive advantages, work together in a way that actually unlocked incremental value because of the way these businesses work together and function together. We're very far through the road map we outlined there. The first real phases of that were largely around fixing the organization, re-platforming, resetting expense bases, refocusing strategy, rebuilding talent. And we're largely through those phases and are very much focused on what we might have described as Phase 3, where we're continuing to enhance those systematic, sustainable competitive advantages, lock them down and tighten them down, and then use them to grow the franchise more effectively. We clearly demonstrated an ability to do that on an organic basis and an inorganic basis. Our Infinity acquisition was really a success on about every metric we could find, both financial and strategic, that has positioned the business to further -- in our specialty auto business, further solidify its competitive advantage and grow very rapidly, really, at an industry-leading rate with very attractive returns. We anticipate that we're going to keep focusing on those strategies. The pandemic, well, clearly a global challenge and clearly impacting tens and hundreds of millions of people in ways that I think tear on all of our heartstrings. And I don't want to suggest anything otherwise, but I think your question is more clinical in terms of how it impacts our organization. We have a very strong capital stack, capital position, financial strength. We've got a very strong program of risk management that has enabled us to anticipate these kind of events and make sure that we're ready to deliver on our promises to our customers and all our stakeholders after those events happen. And we're standing again strong and ready to do that. Our priorities, broadly, of building on our competitive advantages and growing the organization will continue, and there's no change to that at all. The sequencing of things might alter slightly in terms of what's a little bit more opportunistic to deal with now or what's just -- what are we capable of doing right now. But it doesn't fundamentally change our strategic view on the attractiveness of these businesses, the attractiveness of our position in the market and the strength of knitting them together into a combined organization.

Great. That's great. We'll get to the kind of near-term implications of your business on the pandemic, et cetera, in a little bit. But one of the areas, just kind of high-level, I want to start with. How do you think this virus in the pandemic and economic shutdown sort of impacting the industry longer term? How will we look back in 12 months and think about what this did to insurance? And maybe specifically for insurance -- or for auto insurance, a part of that discussion is usage-based insurance.

Yes. Sure. I think there's clearly a disruptive period of time when you think about it purely from an industry perspective. In many lines of insurance, the key driver of loss has been significantly impacted with reduced frequency. If you're dealing with workers' comp or you're trying to track something based on payroll or receipts, if you're dealing with auto insurance, where you're -- while we're charging per vehicle, miles driven and activity have a huge impact. Those are all seeing frequency reductions partially offset with some severity changes but basically a downturn. You're seeing other parts of the industry where we're likely to see claims tick up, possibly workers' compensation. There's certainly going to be a heavy degree of arguments around some commercial insurance and business income interruption. And then in all of insurance, we collect premiums, payout losses sometime in the future, and we invest the funds in between, and we're having a massively disrupted investment environment. So I think we're going to see a bit of turmoil for a little while. Long term, insurance is going to be an essential function to make the economy run and function. So I expect the industry will rebound very well through that. It does very well in both recessions and economic booms. What I expect in the auto world, we are going to see and have seen some reduction in frequency for a while. I expect severities will be up that partially offset that, and we'll see that for a while. But most of the industry is responding to the big frequency changes with premium credits or premium rebates. So that should dampen the impact that has on earnings. We've heard lots of talk about telematics and usage-based insurance. We should remember there's sort of 2 big overriding themes with that. One is the question of what's actually going on with those items? Are we using the telematics or the usage-based item to determine how someone drives, so a predictor of loss? Or to decide how much they drive? Most of those today are being used to predict their behavior and how they drive. There are relatively a few cases where the rating basis has shifted to miles driven or sort of a pay-as-you-go. It's possible we'll see that shift going forward, but that gets me to the second piece. At the end of the day, all we're doing in insurance is we're pooling the cost of the accidents and pooling the risk. There's a certain set of loss costs, there's a certain set of expenses to administer it. And then the premium covers those costs. If we shifted the basis from how many cars do you have or what time -- type of car you have to how many miles do you drive, we're still going to, as an industry, have to count -- get roughly the same amount of premium. Now it may distribute a little bit differently from one consumer to another, but the net premium in total is going to have to be comparable. Most of what we've seen from telematics or usage-based insurance to date has been around how you drive, a predictor of who's a better driver, who should be getting a risk surcharge or discount based on their ability. We've seen some increased consumer discussion or talk about it. I think what they're largely trying to do is get an impact at how much, not how they drive, and there's a limited availability around that to date. That will be a much bigger switch for the entire industry to deal with because it's a whole new rating basis.

Got you. And just on that historically, we kind of talked about it's probably less likely to be adopted in the nonstandard market. Is that still kind of within there?

We would largely expect it to occur -- to get into the nonstandard marketplace slower because in the category of sort of how you drive, typically, the consumers that are interested in it perceive themselves as being better, safer drivers and are looking for a discount. The consumers who assume they're not quite doing as well or they're in the penalty box for some nonstandard auto reason typically have been more reluctant to move into that place because they anticipate there'll be some surcharge or negative issue happening to them. So we continue to believe that while at some point it will likely move across the auto market, the specialty auto space will be -- the customer base will be a lagging driver there, not a leading.

Got it. Got it. Can we just spend a couple of minutes on distribution? I think in general, it'd be helpful to have an overview. I'm talking about the specialty market in particular here. Who are your distribution partners in that space? And is it a unique footprint relative to the standard or preferred auto market? And then the derivative question is, when we think about COVID and some carriers doing things for their agents, is there anything in that space where you're seeing some of your distribution partners have cash flow pressures?

Sure. We, in our specialty auto businesses, are principally an independent agency distributed carrier. We have some modest direct operations that Infinity had started. And I say they're modest. They're about the same size that they were when they were in the Infinity business. It's not a material size. And it's less of the -- what some of us may, being industry veterans, consider traditional non -- or traditional direct. And a little more of customers who may have been customers of ours 9 months ago, 12 months ago, 15 months ago calling us because they want to come back rather than us doing a lot of marketing to stimulate the demand. What we tend to see in a specialty auto customer is a particularly price-sensitive customer. And they're in an end of the market where a lot of times, there's a wider range in the pricing volatility than there might be in a more standard and preferred environment. Most of the carriers that are direct writers, the 1 (800) direct or xxx.com direct, are players that are trying to spend the acquisition cost upfront that you might find from a commission-based program and recover it over the lifespan of that policy. They're very sensitive to the acquisition cost per policy and to the retention or the lifetime -- the full lifetime value of that customer or the lifetime that premium is going to occur. Specialty auto tends to have much shorter retentions. So you have a much shorter period of time to recover those dollars, and it's harder to make that return on investment work. So most true direct players don't focus on the specialty auto world. Most consumers don't shop that way because they want to get 4, 5, 6, 7 quotes. They want to get a broad array of quotes. So they're making sure they've got a reasonable array of pricing. Typically, when you go online direct or 100 direct, you have to go to each individual carrier to get your price. It's very inconvenient, very time-consuming, very erratic. The specialty auto customer is really looking for somebody to do that for them. So again, it's a place where we see less impact. What we have been seeing -- and what's good to know, most people don't walk into their independent agent office today. They call them. They're sending e-mails. They're -- what they're doing is they're finding someone on the other end of the line that they're -- shopping for them. So what a lot of our agents had is they weren't necessarily ready in the early days of this to have their staff working from home. Customers weren't calling in as much. They weren't as ready operationally to handle that. Given a couple of weeks, I think everybody has figured out how to hook up the Internet at their home and move computers around and work the phones. Those agents have as well. Their CSRs are up and running. They figured out how to get the calls routed to them. And commerce is able to work as effectively as it was before, and we're just starting to see consumer demand ramp up a little bit. Over time, I don't think this changes the fact that people will increasingly want to transact business on the phone or by e-mail or by using apps. Those things will continue. But I don't think it dramatically disintermediates the agents in the specialty auto space. I mean I've been in this business 30 years. And when I got here, people have been calling for decades for the elimination of independent agents. So maybe it'll happen at some point, but it hasn't happened in the 3 or 4 decades I've been watching it.

Got you. Would you say that, in general, the distribution that you work with is largely single ownership, family-owned? Or is it -- does it tend to be part of a larger network or a larger broker system?

It'd be really hard to characterize. We've got tens of thousands of these relationships. We're a broad distributor there. We've got your typical -- stereotypical bucket shop that's a pure nonstandard player. We also have more family-owned or small business owners who might be in a Hispanic neighborhood with a particular focus on that customer base. We've also got folks who have very sophisticated larger operations, multi-sites, even call center capability inside their own view. So we have a range of sophistication and a range of tailored service offerings inside the plant.

Got it. Okay. So let's think about the earnings call that you guys just had in your first quarter results. And everyone's mind has kind of gone to auto frequency and no one's driving anymore. But it seems like it's more complicated than that, right? So maybe let's kind of start with the frequency discussion. And I think, generally speaking, people would have -- conventional wisdom would have said nonstandard auto usually sees the most frequency benefit in an economic downturn. It sounds like that's not the case because as we know, this is kind of an unprecedented situation. So maybe just comment on the dynamics at work there.

And when you say it's not the case, are you sort of leveraging that off the comments that I made on the earnings call?

Correct. So referring to the spectrum, yes.

Yes. So let's do a couple of things. Let me address that piece first, and then let's talk sort of broadly about the interplay of frequency, severity, bad debt, sort of everything in the ecosystem. And maybe Jim and I will tag team that. Let me start by cleaning this up, and then I'll let him take a shot at those components of how they interact. First, I probably used a set of words answering a question that may have made people think we were saying nonstandard and preferred. In our book, we're experiencing significantly different results. Let me try to clean that up and be -- I would answer it in an attempt to be very precise when somebody asks what happened to our results in the quarter. January and February really saw no difference for anybody in the economy. It was when things started to get weird in March and you started to see miles drop off. And as you recall, different geographies turn things off at different rates. Our preferred business is more modest in size, and our preferred and specialty businesses have different geographic distributions. And their customers may have slightly different views in terms of where they are occupation-wise, but I think it was more substantially driven by the geography. And if you're talking about the last 2 or 3 weeks in March and the frequency impact, what we were commenting on -- what I was commenting on was that our preferred did not see -- or saw more frequency benefit than our specialty auto business. But that's largely making a comment on those 2 businesses relative to the first quarter and the impact on those 2 or 3 weeks. Interpreting that as anything other than a statement of how the economy shutdown and pace is -- you shouldn't be doing anything else other than that. Once we got through that period, we've been seeing relatively comparable frequency views across these businesses. Now we might expect the bottom line impact to be that -- a little different, but that's because of how the frequency, the severity, the premium forbearance, the other items might work their way through, how fee income impacts nonstandard, those things. It might be different, but it's not that we're seeing driving frequency meaningfully different.

Got you. That's a helpful clarification. So I guess it's really...

Jim? I'm sorry. I'm sorry, Seth. Go ahead.

Go ahead, Jim.

Do you want to sort of navigate the economic pieces between the interplay?

Yes. No. Happy to. I think it was well said in terms of what we're seeing from a frequency or other. I think at the end of the day, the way to think about kind of the premium credit and what we're doing is we've really taken a holistic view on what we think the total impact will be. And so a component of that frequency benefit that we're seeing on both sides of the benefit, right? We have taken into account, from an economic standpoint and other, to make sure that we're able to provide our customers a good level of assurance that we're -- we maintain our solvency, all those types of things, that we're not trying to benefit from this environment nor are we trying to put ourselves in an adverse position from a financial perspective or other. And so that premium credit that you saw, the 15% when we put out there, was not a sign relative to what maybe others were doing when you think about that specialty business, but is about what we think is going to happen from a severity perspective and how things -- results will likely manifest themselves. What do we think is going to happen kind of on the fee side? How much do we think we're potentially going to pay relative to bad debts? Our normal business model on the specialty side is not to provide insurance on a credit. And right now, relative to some state mandates or other things, we are providing insurance in some select areas effectively on credit. Now we've done the best to manage that. We understand the time period. We're doing what's right for customers, for our states, for our communities. But we've sized essentially that premium credit based off our best estimates to really be neutral overall. And we've tried to make sure that we're being very thoughtful for our customers as well as being thoughtful for the rest of our stakeholders in the model and making sure that we've done the right things on all fronts. And I think you'll see that as we go forward. And that's really how you might think about this, is really an ecosystem view versus a, hey, what's happening? [indiscernible] how the totality of the model plays together in terms of what we're maintaining and working towards.

Got you. So is a fair interpretation -- I think your credit is 15% credit based on April and May. It's fair to think about that 15%, the dollar value of that as sort of your view of the neutralization that would put you and the customers back where you would be otherwise for that period?

Yes. To avoid confusion, it's an estimate, but it is our best estimate of what that is.

I'm going to tweak the words there for a second because a lot of times when the CFO or the accountant says best estimate, there's a view. Now I'm going to be the guy who is doing the sales and product management and marketing pieces of this. We took a forward-looking view when we made the announcement before we had the benefit of the experience in April or May. So it was not an accounting best estimate. We tried to take all of those things into account that was moving through there and took a view. And then if we thought it was 12.785%, that's what we would have booked. You like -- you got to pick a number that actually you can communicate to a customer and the world, and they already think ill of insurance people in general. 12.875% might not have be -- we picked 15%. It was a -- but yes. It should accomplish -- take into account all of those different competing priorities together.

Got you. That makes sense. I guess have the conversations continued in terms of is there any likelihood that this extends to June? I mean, I guess, based on your footprint, particularly on the nonstandard side, I think Arizona is already at a point of allowing sporting events, right, so you're probably in a better footprint. But just how are those conversations...

So let's separate different pieces of it. There were some requests by some states because of the shock of the initial item to provide extended grace periods or some level of premium forbearance, not cancel folks right away. We average a 6-month policy. Somebody asked for a 60% -- or a 60-day grace period. Extending that another 60 days would mean 120 of 180 days, somebody might not be paying for their insurance. That doesn't work. That concept isn't there. So I don't know how we wind up meaningfully extending those points of view. There may be something we can do that can be generally responsive. But as Jim mentioned earlier, our business model in specialty auto recognizes that many times, we have folks who don't always pay their bill so we don't extend credit to them. That's part of the model, and that's embedded in how we price the model, in how we service the model, in how we set up fees. A state asking us to fundamentally change that model ripples its way through the entire ecosystem. We would not anticipate extending the billing grace periods we have brought. The second piece is, do we think frequency is going to remain low and are people going to stay at home and the like? I don't know what's going to happen in June or July, but Jim described the thought process we had that we worked in, whatever it was, 45 or 60 days ago. We saw a dramatic reduction in frequency. We saw some offsetting changes in other parts of the model. We knew what our relative margins we were producing. Make up a number. If we were producing a 93% or 94% combined ratio, dropping that to a 73% might sound good for a minute as an investor. But ultimately, it's not a good answer. It's not good for the customer. It's not good from a regulatory perspective. It's not good from a public policy perspective. And the likely backlash is probably a call to reduce rates going forward. We had a time period where there was a significant change in frequency that's not likely to happen for the next 12 months. It might be 2 months, it might be 3, it might be 4, but it's unlikely to be 12, 18 months. So we think the right way to do it is to think through the risk trade we were making with customers and make an appropriate adjustment in advance to try to get to those comparable margins. And that's the right trade for the customer, for the shareholder from a public policy perspective. We'll apply that thought process. As frequency works its way back to normal, then we're going to see frequency, severity fees, new business, all that stuff will sort of work its way back out and we'll get within a couple of points and let it work its way out. When it's this disruptive, if it happens again in June and July, it would be rational to assume we take a similar thought process.

Got it. That's great. Jim, you started to hit on it in terms of thinking about sort of the totality of the frequency versus the offsets. But on the earnings call, you did bring up a couple of the severity offsets around salvage and sub-row and maybe you hit on some of those concepts. How are you guys -- certainly, it makes sense, but how do you guys look at that? What were you seeing that caused you to take those -- or make those adjustments in your higher -- your estimate? As well as how are you thinking about what that looks like going forward in terms of your numbers?

So I'm going to try to keep it high level and maybe give you a couple of anecdotes in terms of what we're seeing and what I think others are seeing that will help bring some clarity to this particular item. If we look around both -- the car market in general, has seen a significant slowing over this period of time as well as used cars. The demand for used cars, while, at least in the short term, maybe not in the long term, has come substantially down from where it was, say, 3 months ago or 4 months ago, right? I can't remember the exact last ratios I saw, but something recently suggested I think car sales at this stage are like 10% or 15%, as an example, of what they would normally be or what they were at this time last year. What that means is, essentially, the demand for parts, the demand for everything else that's coming off of that flavor, right, those costs, right, those prices have essentially come down. People are not paying as much for those particular items. While all of that had not necessarily come through, right, in terms of what you might have seen in January or February, when we take out a look of what we expect to recover inside those scenarios, and if you take a case where maybe we had something middle of March, end of March, beginning of March, end of February, right, you've got those particular items where you're now making an estimate about -- in the future about what you're going to get back from a recoverability. When I look at the market and when we look at that market, it's slowed. The price that folks are getting for those same things has slowed. Many of the overseas markets that might drive that demand has slowed. And so we thought it was prudent to incorporate those facts into our estimates in terms of what we thought was the likely recoverability. And what you saw was a little bit of development on the '19, a little bit of a difference in terms of our initial estimate or pick for '20. But we thought that was the prudent thing to do given what we were seeing and kind of what the data was informing us of what was likely to occur. So that -- we tend to be -- we try -- tend to be highly confident in the reserve estimates that we put up, and this was something, again, that aligned with those principles and was prudent for us to do.

Got it. So just to make sure I'm -- maybe I didn't phrase it the right way. But -- so based on the adjustments you made, let's say -- I don't think anyone believes it's going to be a perfect snap back in the economy. But if the economy normalizes, does that imply there is some sort of conservatism in your numbers then?

I don't know that I would use the word conservative. I think what we've done is taken a good confident view. If you think about a 50% pick, right, and I don't want to get too technical here, but you could have a likelihood that, that pick was right at 40% on the low end. And on the high end, you might be 80%. We tend to want to be closer to that 60%, 65% type range. And what I would suggest is that the picks in that, similar to the way that we always look at it, we've got that same level of confidence. I might hedge a little bit in terms of what you're likely -- these things are 60, 90, 120-day type matters where you get resolution. And so I don't think that -- if you're looking at what would be behavior and how that's going to manifest itself in the fourth quarter, I wouldn't -- I think that's reading too much into it, and we're getting ahead of ourselves. I think I would step back and I'd be very careful about trying to predict what I think is going to happen over the next 12 weeks, 18 weeks. And for those who are assessing us -- and I feel good about our model. I feel good about the practice. I'd really try to lift this back up and thinking about [indiscernible] that we built today and do we continue to progress those. And then the second thing that I would be looking at is the strength of our balance sheet and our liquidity. And is it going to give us the time to fully realize those? When I think about what the cash box is for this company in an overly simplified way on a 3-year or a 5-year or a 10-year window, right, there's nothing that's occurred over the last 3 weeks, 6 weeks that suggested that total dollars that I would expect to be in that cash box, that what we're trying to do from both a customer standpoint and for our shareholders, is smaller, right? That's my personal view, and I sort of look at it. But as Joe started off, we're continuing to progress on our strategic initiatives. We're continuing to build out the capabilities. We're continuing to do things that will help us maintain a very low-cost position. And while there could be some things that we'll react, just like everyone else in a very uncertain fluid time, because of the strength in that, that we've built inside of the model and the advantages, we are still heads down focused on execution versus trying to figure out how we're going to navigate the next 6 to 8, 10, 12, 18 weeks, whatever it is, through this time period.

The businesses we're in, people tend to continue to buy our products regardless of whether or not there's a recession. So they buy them. So yes, some things might happen between an economic boom and an economic bust or recession, and there may be tweaks on frequency and severity. But like a progressive in a specialty auto businesses watched and then moving into preferred, you've watched them over 25 years, it's not as if their combined ratio bounced around 20 points based on what was going on economically. What you tended to see was there might be a little bit of moves in growth from good to incredibly good, but not to massive compression. And we're dealing in our life business. We're dealing with low face amount life policies that are largely mortality end-of-life policies for folks who find this culturally important. The crisis we're having right now didn't convince them that mortality was not a problem. Like they're -- people's attention are captured on these products. So to Jim's point, we might see modest changes in how the ingredients come together. But the underlying competitive advantages are still there, the underlying product need from customers is still there, and our ability to win versus our competition is still there.

Got it. Actually, that's a perfect segue. So the next question I wanted to ask you was really about the top line and sort of thinking longer term more on the specialty auto side. But if I think about -- if you think about where you see the company in 3 to 5 years outside, do you think more of that growth will have come, like, from market share gains due to consolidation? Or just natural expansion of your target market through demographics? How do you -- where do you see that coming from?

I'm going to answer your question slightly differently. First, we're positioned in businesses -- in a business in specialty auto where we have some significant tailwinds. We're in states where the populations are growing faster than the U.S. We're in market segments with a Hispanic focus that's growing faster than those statewide populations. And we're -- we've got size and scale right now in some states, but we're actually moving to other states so we effectively have new store growth where some of our bigger competitors only have same-store growth. So our same stores have a tailwind. Our new stores are greenfield. There's a plus. All of those things should allow us to grow faster than the market just holding our market share. Then on top of that, in the specialty auto business, we have systematic, sustainable competitive advantages. We are gaining market share in every meaningful geography we're in. I would expect us to be able to continue to do that. So if you're gaining market share in markets that are growing and customer segments that are growing, that should produce some significant organic growth. If that's all we did, was grow at that kind of rate -- and I'm avoiding putting a number in. Just pick whatever time period you want. If there's more sales and more new business, the market's growing a little faster. If there's less, it's growing a little slower. But we're still gaining share. If we're doing that at attractive margins, that's a great business proposition for a shareholder and something you'd love to invest in. At the returns we've got, if we're growing that business 5%, 6%, 7% and did that for the long term, that would be an out of the park home run. We feel good about that. When we think about M&A or inorganic opportunities in this business, we're going to look at them opportunistically. If they're not there because it's the wrong strategic fit or the wrong price from a competitor or nobody wants to do it, we're going to have still generated attractive returns and attractive growth and be a great opportunity. If there is something, that's extra icing on the cake. So we don't feel -- we don't sit back and say, "We have to be bigger just to be bigger." If we're going to do something, we want it to be -- to make us better. And we don't feel like we need to do something in order to be an attractive value proposition for our shareholders. So we don't have a -- something that's pressing us to do something. And when you get pressed to do something inorganic, that's usually when you [ farble ] it and mess it up and it causes a problem. We have the ability to be thoughtful, disciplined and opportunistic. And if something doesn't happen, we're going to have still generated a great result. And if it does, we've demonstrated, like we did with Infinity, that we're actually kind of good at it.

And just maybe a couple of numbers around that. In a period that you saw people's initial reaction in the slowdown in the second half of March, we grew units inside that specialty auto business 10%. And -- or the PIP count 10%. Now it's highly unlikely that the population, in any of those particular areas in that period of time, grew more than 1%, right, relative to that. So that means that we were growing many, many multiples of what the market growth rate is for those units. It really calls out the strength of our model, our cost position, the value that we're bringing to customers, our ability to build scale as an organization, especially when you couple that with essentially the returns, the low combined ratios or the appropriately priced combined ratios coming in there. And the previous 4-quarter average, 28% return on average tangible common equity. Those are really strong numbers from both an efficiency standpoint and an agility standpoint for us and -- that really highlight what we're doing.

Got it. That's great. In the interest of time, I do want to leave enough -- just quickly, let's go on the preferred segment. You guys have been undergoing a turnaround of that business. Where do you feel you are with the results there? And do you feel -- at this point, Joe and Jim, do you feel like that fits into your view of a niche business that has a -- that you have a competitive, sustainable advantage in?

Yes. There's 2 or 3 things there. First, at its current size and scale and focused on auto and homeowners, it isn't a niche business and it doesn't have a systematic, sustainable competitive advantage, and it has a strategic focus issue. So we should be abundantly clear about that, and we've been abundantly clear about that. To have that specialty or focus or that competitive advantage, it needs one of a couple of things. Either it needs to be significantly bigger and have a lot more scale so that it can play head-to-head the same way everybody else is playing. Or it needs to have a geographic specialization. There are geographies that are unique in the preferred business. Maybe it's Massachusetts or Michigan or Wisconsin or California. I mean there are states where things just operate differently. So you can have a geographic specialization. Or the third item we've talked about, I think there's been a lot of arms race in the auto space over the last 20 years and not so much in the home space. So I think there's a room there. If somebody became a more thoughtful competitor and could be a lead with homeowners, make homeowners the competitive advantage, I think there's a niche opportunity there. We're sort of looking at all 3 of those. The -- we're not going to try to grow one policy at a time and get scale. That's -- you can't start when you're at a competitive disadvantage and do that. That's a dopey strategy, so we're not suggesting it. That would have to have some level of inorganic nature to it. I'm not highlighting or moving there, but I'm just telling you the thought process. The other 2 could have organic components around them. So where we are is that the business needs to improve its profitability to be making reasonable returns. We've been aggressively [Audio Gap] expense perspective. We'll inure to the benefit of our preferred business on the auto side. We believe we have the same -- a similar product management thought process that will enable us to win in that space or do a better job in that space. So we believe we can improve the profitability over a course of a couple of years, and we effectively have a low-cost option on looking for one of those strategic positives. If we get out 2 or 3 years, and we don't think we can make it work that way strategically, we'll have improved the profitability of the business and it will be more salable, so we'll have gotten a return. If we find that we can get that strategic advantage, we will have made some level of return and use that benefit to fuel that process. So that's how we think about it. It made some good progress this quarter. On profitability improvement, it's benefiting from some of the environmental issues going on, plus the work we've been doing sort of on every one of the levers. It just moves slower than a specialty auto business because it tends to have 12-month policies and it just takes longer for those effects to earn it.

Got it. That's great. Yes, again, interest of time, but I do want to touch on life and health. So maybe just, one, your high-level thoughts on that segment and how you see it operating in this environment. And then I think on the earnings call, you talked about, it was still too early to think about morbidity assumptions related to COVID. Obviously, that makes sense. But what are you looking at? How would us from the outside should be looking at death rates, hospitalization rates? Is that the sort of stuff that you guys are looking at?

Yes. This business, we like this business. We think it's a core part of the organization. It is one of the businesses where we have a systematic, sustainable competitive advantage. It provides a lot of benefits to the overall organization, not the least of which is the capital diversification benefits as it works with our specialty auto business. Both of them are enabled to generate more attractive returns and be more price-competitive because of those advantages. The business, very short term, has seen a slowdown in new business because we actually shut down the new business. We kept our sales folks off the street and not soliciting new business. We wanted them to -- them and their customers to help flatten the curve and stay healthy. Sometime in the second quarter, we'll restart that new business. I think long term, that has no meaningful impact on the valuation. I don't even think it has a big impact on results for the full year. But there might be a little bit of noise around that even if you're just trying to pick a model. From a mortality perspective, remember the mechanics of what's going on here. We write low face amount life insurance business. The average new business policy is about $11,000 in face. The average in-force is about $5,000. When you have a face amount value of $5,000, you're always sort of putting up a reserve for losses. So your net amount at risk is the difference between the face amount and net reserve. If I'm a 5 year old, most of the net amount of risk is face. If you've got an 80-year old, you've already reserved a lot of dollars for that loss. So you don't have $5,000 at risk anymore, you might only have $1,000. There's a much tighter net amount at risk. If that person dies, it's the net amount of risk that runs through the P&L. Now let's just do a little speculation. I told you the average face amount of in-force is $5,000. You could reasonably assume that the people who are older have a lower average face as a group. We've all heard that COVID-19 has a larger mortality impact on older populations. So if you started and said that group has a lower face amount than $5,000 and it has a less net amount at risk, or the percentage of face that's remaining is smaller, you're going to come to a modest-sized number per person over a certain age. Then you've actually got to say, what does the mortality rate in the U.S. have to be so that our market share of that number times that relatively small net amount at risk is a big enough earnings number that you're troubled near term? I'm not in any way trying to minimize the human risk or the human toll or anything else. But if you're just trying to do the math, it's not going to be a meaningful mortality issue that runs through our numbers that has the impact on that business. If it is a big -- and said differently, if it is a big enough meaningful mortality issue for us, we have whole other problems in the economy.

Got it. That's helpful. We are a little over time. So guys, I really appreciate you spending the time with us this afternoon. I thought the session was great. It's a great follow-up and clarity on the things you discussed on your earnings call. So again, really appreciate it, and stay well, everyone.

Thanks, everybody, for your interest.

Thanks for all of you who joined. Appreciate it.

Thank you.