Kemper Corporation (KMPR) Earnings Call Transcript & Summary

Good morning, everyone. Day 2 here at the Raymond James Institutional Investors Conference. And this is my side office. This is where I sat all day yesterday, and I'm here again today. So thank you, everyone, for being with us this morning. A bunch of insurance companies and insurance brokers here over the 3 days. And one of the companies that's been a very loyal and long-standing participant of our conference has been Kemper Corporation. And it's been an interesting journey to say the least. Lots of challenges in the auto insurance market over the last 5 years. And Kemper has had both successes and some challenges as well. So this morning is supposed to be set up as a, I guess, a fireside chat minus the fireside. But in the 28 minutes and 38 seconds we have left, I thought what I'd do is have Tom, who's serving as Interim CEO, provide a couple of minutes summary of the state of the union as it relates to Kemper, where you were at the end of last year and what the outlook is as it currently stands. And then we can, of course, use that as a launching pad to get any questions about what's going on in the auto market in your various states. So go for it.

Sure. Good morning, everybody, and thanks, Greg. Just a little bit of background on myself. I've been with the company. It will be 34 years next month. My normal day job is General Counsel, but I've served in a lot of roles over those 34 years. And I joined the company shortly after we got spun off from Teledyne. So I've seen the entire ride. And as Greg said, it's been an interesting journey. Some businesses we were in, got out, some new ones that we picked up. These days, we're really focused intently on our 2 core businesses, which are the auto business, nonstandard auto with a very significant piece of that, that is commercial, smaller fleets and then our Life business. As you said, Greg, the last 5 years have had some challenges, some really good moments. Coming out of COVID, we certainly ran into a little bit of bumpiness. And last year, saw some of that return just with some of the environmental changes in our key markets, particularly in California and Florida. Looking -- going forward, as we look at '26 and '27, what we're really going to be focusing on are those 2 core businesses, operating them with greater efficiency and a little bit more discipline, looking to restore profitability and at the same time, take advantage. We made a lot of investments over the last few years, replatformed a lot of stuff. Now it's the time for us to take advantage of some of those investments and really see what they can do for the businesses. So the couple that are still in flight, we're going to -- we want to get finished and then really use the next couple of years to maximize getting the benefit out of those efforts.

It makes sense. So thanks for that summary.

So let's start. Really it feels like our discussions should focus on a state-by-state discussion and maybe it's California and the other states, although Florida and Texas are its own ecosystems. But let's, for the moment, focus on California. So stepping back, there were some changes in what the minimum limit liability profile looked like for the state. So walk us through the history of what it used to be, what the changes are, were and how it's affected your business in that state?

Yes. And I'll invite Brad to chime in as well. For those who are not familiar with the situation, California had not changed their minimum financial responsibility limits in almost 60 years. Considering what a huge state it is and how important the auto insurance market is there, they were -- they were 1 of 4 states that had extremely low limits. So in 2020 -- late 2023, the legislature adopted a new bill requiring that the limits be increased effective January 1. They doubled for physical damage and liability. It turned out to be -- sorry, a real disrupting event in the market there. You can always try to anticipate what something like that is going to be. But until you're actually in the fray and see how it's playing out, it's hard. We made the adjustments. We made the filings as everybody else did. And we knew we'd have to make fine-tuning as we went along, and we're doing that now. We're taking rate there. For us, it's had a bigger impact, I think, than a lot of carriers just because such a big piece of our block of business there is minimum limits. So the impact for us there, I think, was exaggerated compared to some other carriers. So we're fine-tuning. We're taking rate there. It's had a significant impact in the BI losses that we're incurring. One of the things that people knew was likely to happen when the limits were coming in is that it's generated more lawyer attention. There's more money on the table, so that just draws a lot of personal injury lawyers.

Have you seen -- do you have something to add, Brad?

He said I'm the numbers guy, right? So maybe I'll add some numbers and some context to Tom's comments here. As Tom mentioned, a good chunk of our business is in California, almost 70% of our personal auto business is there. More than 90% of our business there is minimum limits. And so when you double and triple those minimum limits, that's a big change. And as Tom said, we're working through those adjustments today. When you think about our performance over the last 6, 8 months, you've seen our combined ratio creep up. That's been driven solely by California. California loss ratio has gone up about 15, 16 points in the back half of '25. And we're working to address that. As Tom mentioned, we're focused on our claims handling process to mitigate the BI severity trend in the marketplace. Right now, when a claim comes in, and those coverages, almost 80% are coming with attorney attachments Attorney attached or attorney rep to claim is 3.5 to 4x more expensive than a non-rep claim. And so we're making adjustments there to get that right. Additionally, we're taking rate. We talked about last quarter that we filed for rates in California, a 6.9 percentage increase. But we look at that at the headline, 6.9% doesn't seem very much with the adjustments of the underlying coverages, you get north of 40% in the liability coverages and your metals coverages are coming down. So we're happy to announce that, that rate was approved and will be effective in the market here in about a month.

That's great news. So on the 6.9% rate increase that's been approved, is that -- I feel like the combined ratio is running even with that would still be a little bit above your target. Does that mean there's going to be another rate filing that's going to follow after this becomes effective? Or do you think through policyholder adjustments, you can get back to the levels of profitability that you're looking for?

We'll do what's actuarially justified in the state and what we need. The key thing there is you can keep taking rate, but you need to be competitive in the marketplace, right? And so we'll do -- we'll get rate as we need. But we really need to focus in our processes, looking at claims and mitigating those claims at a lower severity. So we're focused on that. Additionally, in the third quarter, we announced a restructuring charge. We've changed some leadership. We're focused on cost optimization, process optimization to be more competitive in the marketplace. And so those things plus non-rate actions, which we talked a lot about during the COVID period that we could take in California, we're doing those as well.

Back to non-rate actions as well. So that's great. So well, that's great news about the rate increase for you in California. It seems like -- I don't want to get too far in front here, but it feels like the insurance commissioner and the insurance department has learned a lesson and they seem to be a little bit more responsive in California than what the legacy record might suggest. Is that an accurate perception of what's going on? Or...

Yes, Greg, I would say that's accurate. I think the broader insurance market, particularly Homeowners there has been in such a state of disarray, such huge losses from all the wildfires is that over the last 3 years, I would say we and I think more broadly, others in the industry would say they've seen a higher level of cooperation and wanting to work with the industry to make some adjustments, including trying to speed up rate approval. It used to be a painfully slow process, and it has gotten better, definitely.

Yes. Well, thankfully, you don't have wildfire exposure and not writing property insurance in California because that would just be another...

Very grateful for that.

Another source of concern for investors. But let's just stick on California for a second because you talk about attorney rep rates because the limits have gone up. Can we pivot over to the commercial vehicles side of the house inside California? Because I feel that the liability profile of those type of policies is a little bit larger, too. So does that mean that you're seeing any change in your attorney rep rates on the commercial vehicle side of your book of business inside California?

Not significant changes there because no change in limit profile, same type of business that we're seeing. We continue to see increased BI severity just as attorneys are helping claimants with more innovative treatments and they're trying to move closer to that limit, whether that's $500,000, $750,000 or even in some cases, $1 million. And they're taking longer to settle. And so as they go through this process with the latent development, you continue to see increase in severity, but no real change there. And obviously, we've had some adverse prior development the last year or so. And that's been predominantly in accident years 2023 and prior. We changed our reserving practice in '23, and we're happy and pleased with those results for accident years '24 and '25. But you saw in '23 and prior some, we call large losses. Our large loss is defined as anything greater than $250,000. It's a low frequency, high severity event, and those have developed more adverse than we anticipated and taking longer to settle. And so we've made those adjustments. Our hope is we've captured most of that. Given that the counts are down significantly, we worked through a lot of that inventory. My expectation is that adverse development has diminished as we go forward.

So we'll see when those statutories are out here, and they're probably out right now. We're just waiting for S&P to come through with them, but we'll see claim -- total claim counts come down a little bit in...

Specifically in large losses.

In large losses. Excellent. That's great news. Just on the front end of the house for commercial vehicle inside California, talk about where you are in the rate cycle. Is there any pending rate filings you have there? Anything going on that might lead to either a change in top line or policy counts there for commercial vehicle in California?

My expectation is the commercial vehicle continues to grow. It's grown fairly significantly over the last 3 to 5 years. We're almost at $1 billion. So it's grown...

That's the overall book...

The overall book. California is about 50% of that book. So pricing looks very solid. The market is still very strong from an insurance underwriting standpoint in California for the CV market. So I expect it to continue to grow and deliver low 90s combined ratio performance.

That's excellent. And when it comes to the -- just the -- if you get to -- ever get to a point where you need to hit the rate pedal, is the process for rate approval different inside commercial vehicle than it is for the nonstandard book? Because I feel like there might be a different process, maybe it's a little easier or not. I don't know...

You're right. It is easier, and there's a lot more latitude within the commercial space. So we're able to get rate as needed more quickly.

Excellent. Excellent. Just closing out on just the California piece because, again, that's a big piece of your business and very important to the outlook for your company. The rate increases through our commercial vehicle aside from the reserve development seems to be in a good position. Is there anything going on underneath, from the expression underneath the hood from a claims perspective that you want to call out that might cause some adjustments this year? Or do you think that with all the changes you made operationally, do you think that you're at an inflection point where actually things can stabilize in California and maybe potentially get better?

Yes. We made a number of changes starting really in the middle of 2025 to the claims organization, shifted some responsibilities around with an eye towards being able to address what Brad cited in terms of the increased BI losses we were experiencing. So we've got members, more experienced claims people and some of our legal team getting involved earlier, making some adjustments in some of the claims practices. Additionally, as I think you probably know, we have a new Chief Claims Officer as of the fourth quarter, Andy Ramomoorthy. And Andy's focus right now is trying to see what we can do to improve the processes and the operations to get claims settled faster, make sure we're addressing them quickly because if you can cut some of that time out, you reduce the attorney rep rates and it makes a huge difference in what the overall loss experience is.

Yes. Makes sense. And what I'm about to ask, I'm obviously focused on California at this moment, but it's obviously a broader question. Is there any technology tools that you're able to utilize to help you with these processes? It's one of the biggest themes at this conference in this year is AI and the evolution of ChatGPT, Claude. It's rippling through its potential effects on other areas inside the insurance universe and broadly -- more broadly speaking. So I feel like there's some opportunity for you guys to deploy some of that to help specifically in California with attorney rep rates and all that stuff, but maybe also across your entire book?

Yes. We're -- we have been -- so this is not anything new for the last 5 years evaluating a lot of different tools to mitigate attorney rep rates to get information quicker to look out and suss out fraud. We have some great partners in that space that help us do that as well as new firms coming into the space with different technologies that have been very helpful. So it's helping with workflow automation. It's helping with -- claim resolution is helping to predict future costs and what medical care treatment should cost or what federal should cost. So we continue to evolve that with our innovation group, and we like what we see. It's -- I still think we've been doing it for many years now. But as technology gets better, as you get more data and you use it better, the results will only improve over time.

Yes. The innovations are coming so fast that the opportunities to improve processes are just accelerating. The one thing you want to be a little bit careful is making sure you're putting your bets in the right technology. So I happen to be down in our Birmingham. We have a very large facility in Birmingham, Alabama. And I spent some time with the innovation guys down there a couple of weeks ago and was really impressed with some of the things. They're still in the development stage, and they're still trying to figure out where the applications would be most advantageous. But I agree, it's got a lot of promise. We'll continue to roll things out as we get comfortable that the investment is worth it and that the technology works for us.

Yes. It feels like there's a lot of opportunity for your company and for the industry to utilize some of these tools to improve efficiency, improve outcomes for your consumers. This is great. So I want to -- we got to talk about Florida. We got to talk about other markets. We got to talk about Texas. So let's pivot to Florida, which is another large state for you. A lot of changes inside Florida. And it's been topical here because of the legislation that's been passed that's curbed the trial bar. So talk to us about your experience in your nonstandard auto book, first and foremost, because inside Florida, and then we can pivot to CV if appropriate.

Sure. The tort changes that were adopted 3 years ago this month, as you said, really have changed the market here a lot. And I'm not a Florida resident, so I'm jealous because your insurance rates are going down, whereas those of us that live in other states, our rates are going up. But it's really put a major dent in the litigation industry here. I noticed there's still no shortage of billboards in the state, pushing by the trial bar. But yes, I think it's been an interesting lesson that you hope other states will take note of. And I know different business organizations, not just limited to the insurance industry are trying to figure out how to package what happened here and take it to other states to be like, look, you want to help your citizens here and reduce their rates. These are the kind of things that really make a difference. So for us, we saw a significant drop in litigation. There was a huge wave of suits filed in '23 right when the bill was about to get enacted. But there's been a dramatic drop off since, and it's been great. The market here has gotten more competitive, and that has its pluses and minuses for us. You're seeing carriers come back into the state that we're avoiding it for a number of years just because the climate had been so bad.

Yes. And our goal is to grow everywhere in our core markets, California, Florida and Texas. Our expectation is we'll grow faster in Florida relative to California, just given the size and scale and the opportunity here. We took a restructuring charge and did some cost savings in the fourth quarter. We reinvested part of that savings in Florida. And so that allowed for some price reductions. The market, as Tom mentioned, had become much more competitive, and you saw our policy in force growth come down a little bit. We've seen it now stabilize in the fourth quarter. It did come down a little bit with normal seasonality in our market, which tends to see a lower buying season in the fourth quarter and it picks up in the first quarter. So we're liking what we're seeing from a results standpoint there with the actions taken in Florida. We think it's a great market to grow in, and we expect to grow more.

Excellent. Well, as a consumer and residential Florida, yes, the rates have been coming down both in Auto and the Homeowners side. So it's a welcome change. It's nice to see that legislation can have a positive effect. So let's spend a minute or 2 on Texas, too. Again, each state has its sort of own ecosystem, but maybe talk about conditions for your company in nonstandard auto in Texas.

Good. Well, I was just going to say the Texas market is unique in that it's so fragmented. There are so many carriers down there. Right now, I would say we're having some slight growth there. We're looking for additional geographies in the state that we could expand into. We have a new product that we rolled out last year, a new auto product. It was introduced in Oregon and Arizona. I think it was the third quarter or second quarter last year. We have filings pending in Florida and Texas to introduce that product in those states and expect to have approvals and be able to start getting that into the market sometime either probably now it's the early second quarter. But any time you have a new product, it takes a little while to fine-tune it. But we believe that the Texas market is a very attractive one. It lines up well with our -- the demographic we pursue. So we see that as, as Brad said, another growth state for us.

And the -- I know we've been -- I've been focused on the nonstandard auto piece. Commercial Auto in those markets, I assume you still have a positive view on the opportunity set there as well.

That's correct. Commercial vehicle, both in Florida, Texas and Florida continues to grow, and we like the results. We'll continue to invest in that segment. And we believe in the team, we believe we'll continue to deliver.

Yes. For everyone listening in and here, it's remarkable, as I'm sitting here listening to you talk, it's remarkable how at the start of the inflation wave that happened in '22 and '23 that your company was viewed as a forward-looking company that saw some of these trends before the rest of the market did, and it was a testament to some of the insights you had in your specific businesses. So it feels like the company should be able to turn the corner, especially now that you have the rate increase approved in California. We have just a couple of minutes left. I think a good point here would be to pivot to like the financials -- and as investors look at the results, the expected results for '26, what are the right sort of performance metrics that we should be considering and evaluating the performance of the company versus the rest of the market, let's just take your company by itself and how should we -- what would a successful year look like for Kemper in '26 and give us some benchmarks that we can use.

Yes. We went over this in the fourth quarter call. I think, first and foremost, one of our goals is to reduce earnings volatility. Our personal auto business is our largest book of business with 70% roughly in California. So we articulated that we're trying to grow everywhere, but also grow faster in states outside of California. So looking at growth and diversity out away from California to provide more stability. So I'd be looking one at our growth, where we're growing and then ultimately, how that book of business is performing and how the combined ratio is improving. The combined ratio in both Florida and Texas, we're making an underwriting profit. California is seeing some pressure due to the BI severity trends that we talked about. We'll see that rate come in here in about a month and earn in. And getting that book back to profitability and performing will be crucial for the success of the business. So PIF growth, diversification, and the -- ultimately, the underlying performance of the book of business in the combined ratio or the loss ratio. The other thing I would focus on, and Tom talked about this earlier, is our efficiencies. And so not that long ago, we had an expense ratio in the high teens. Our expense ratio, 21.3%, 21.5% right now. Our goal is to bring it down by a couple of points, and that will do a few things. One, it will help us be more profitable. Two, it will help us be more competitive in the marketplace. By taking out expenses, we can reduce prices and grow a little bit more effectively. So just those handful of things right now, I think, are most critical.

Excellent. I think appropriate finishing spot would -- and we didn't talk about the Life business, but capital. And I know the Life business does provide you some diversification benefits from the standpoint of capital. But can you talk to us where the company's capital position is today, its attitude towards excess capital, and you can wrap in a discussion on the Life business, if appropriate.

Yes. I think from a capital and liquidity standpoint, we have a strong capital position. We have strong liquidity position. Moody's came out and reaffirmed our rating yesterday, low BBB- or Baa3. So we're not worried about capital at all. We have sufficient capital to weather any volatility that we see in our markets as well as to fund future growth. So strong capital position, strong liquidity position, not really looking to give capital back at this point, given what we're trying to do, we see it's worthwhile from a return on investment standpoint to invest in the commercial vehicle business, which is growing, which requires a little bit more capital than the personal business. And then investing some of that capital in strong states like Florida and Texas.

Makes sense. And so I didn't ask the question, and I know you're not going to use this format to make an announcement. But probably worthwhile just closing out, just give us an update on the CEO search process. I know we talked a little bit about beforehand, but maybe just for the benefit of everyone listening, you could just give us some updated perspectives there.

Sure. Our Board of Directors has a search committee. They've got a slate of candidates that they're in the process of interviewing. These things usually take anywhere from 6 to 9 months. And I don't have any reason to think that, that time line will be much different here. I do know our Board has some specific things they're looking for, and they're going to be very deliberate about making sure they find the right person to take us through the next chapter.

Great. Well, so we've hit the 30-minute mark. And so for everyone here, there's going to be a breakout session that follows, and that's going to be down in Cordova 6. So we thank everyone for being here this morning and certainly, management, Tom, Brad, Michael, who's in the audience, thank you very much for being here at the 47th Annual Raymond James Institutional Investors Conference. And everyone, have a great morning.

Thanks for having us. Appreciate everyone's time.

Yes. Thank you, Greg.