Kemper Corporation
Q1 2012 Earnings Call Transcript

Published: 8 May 2012

[Operator:]

Good morning, ladies and gentlemen, and welcome to Kemper's First Quarter 2012 Earnings Conference Call. My name is Tyrone, and I will be your coordinator today. [Operator Instructions] As a reminder, the 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.

[Diana J. Hickert-Hill:]

Thank you, operator. Good morning, everyone, and thank you for joining us. After the markets closed yesterday, we filed our Form 10-Q with the SEC and issued our press release and financial supplement. You can find these documents on the Investors section of our website, kemper.com. This morning, you will hear from 2 of our business executives, starting with Don Southwell, Kemper's Chairman, President and Chief Executive Officer; followed by Dennis Vigneau, Kemper's Senior Vice President and Chief Financial Officer. We will make a few opening remarks to provide some context around our first quarter results. We will then open up the call for a question-and-answer session. Please note that our discussion today may contain forward-looking statements. Our actual results may differ materially from these statements. Please refer to our Form 10-K filed with the SEC on February 17, 2012, as well as our first quarter 2012 Form 10-Q and earnings release for financial information on potential risks associated with relying on forward-looking statements. This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. In our 10-Q, supplement and earnings release, non-GAAP financial measures have been reconciled to GAAP where required in accordance with SEC rules. And now, I will turn the call over to Don Southwell.

[Donald G. Southwell:]

Thank you, Diana, and welcome, everyone to our inaugural earnings call. We've been taking several steps over the past couple of years to expand communications with our shareholders. These quarterly earnings conference calls are part of our efforts to the increase interactions with both investors and analysts. On today's call, I'm going to talk about 3 topics

[Dennis R. Vigneau:]

Thanks, Don, and good morning, everyone. Today, I'll provide further insights on our first quarter performance in several areas

[Donald G. Southwell:]

Thanks, Dennis. In summary, we face challenges in some areas and made progress in many others, including pricing actions, agency staffing, courting customers who align with our value proposition and capital management. We appreciate your attention this morning. And with that, I'll turn the call back over to the operator to take your questions.

[Operator:]

[Operator Instructions] Our first question is from Steven Schwartz of Raymond James.

[Steven D. Schwartz:]

If I may, a couple. Could you, Don, could you remind us -- you're referring to, in Preferred, your target market, could you remind us what that is and then maybe talk with reference to the type of rate increase that you're looking for in those 20 states, in homeowners?

[Donald G. Southwell:]

The target market for Preferred are customers with assets to protect. Generally, what would be considered Preferred customers for our Preferred business may -- would have good payment histories and multiple cars and often buy package policies. In terms of rate increases, we are looking definitely for double-digit rate increases in those 20 venues, and I guess I'll turn this to Dennis for a little bit more detail on the rate increase.

[Dennis R. Vigneau:]

Sure. The countrywide overall will be slightly north of 10% that we're targeting. As I mentioned earlier, the strong double digits will be in 20 states, and we've got 5 of those already filed and approved and are moving very quickly on the remainder. So on auto, certainly less, taking that on a measured basis and see that really in the low- to mid-single digits depending upon the states.

[Steven D. Schwartz:]

Okay. And then, Dennis, while I got you here, the -- could you repeat -- you were going a little fast. Could you repeat what the total dividend is expected from the insurance companies?

[Dennis R. Vigneau:]

Sure. That will be $90 million coming out of the insurance companies. Most of that will be out of the life company.

[Steven D. Schwartz:]

Okay. So that would take the -- assuming that you did that now on a pro forma basis, where would that take the RBC down?

[Dennis R. Vigneau:]

By the end of the year, we would expect to be flat with the 450% just given normal operating performance in the Life business.

[Operator:]

Our next question is from Ryan Byrnes of Macquarie.

[Ryan Byrnes:]

Just one quick question on Fireside. Just wanted to see what additional steps are required, I guess, for that wind-down and how we should view that, and if there's any additional capital to come back to the hold company from that?

[Donald G. Southwell:]

You should view that wind-down as essentially complete. The last employees -- they're just a handful of employees out there, and we've already accrued for shutdown expenses as a little bit of capital left, a little bit of payables left, but you should just consider it all done.

[Ryan Byrnes:]

And from a capital perspective, same thing as well?

[Donald G. Southwell:]

Yes.

[Ryan Byrnes:]

Okay. And then just quickly turning to the Direct segment. What percentage, I guess -- could you guys give us a ballpark for Michigan, New York, Florida? Just want to try to figure out what kind of run rate we should ultimately expect for that Direct business to run at? And I guess -- and what kind of loss ratio is the target for that business?

[Donald G. Southwell:]

I'm going to hand that one off to Dennis.

[Dennis R. Vigneau:]

We are targeting if -- and I had mentioned that we're within our pricing expectations for the remainder of the states outside New York, Michigan and Florida. It's in the low-60s is where we're targeting on a loss ratio. What we're really focused on is driving the profitability and wrapping up the remaining pressure we're seeing in those 3 states. We don't give outlook or guidance at this point for the full year, but you can look at the first quarter results, and there will be certainly volatility along the way, fluctuations in that. But we don't expect on an enterprise level to see the Direct results have a material impact on our 2012 performance.

[Operator:]

The next question is from Paul Newsome of Sandler O'Neill.

[Paul Newsome:]

Could you isolate what you -- what was sort of the change that -- in your financials that allowed you to do the extra buyback?

[Donald G. Southwell:]

Let me start that, Paul, and then I'll hand it to Dennis for a little bit more color. But we talked in my comments about our capital priorities and those remain unchanged. We were able to pull back a significant amount of capital from Fireside. And as we looked at the year, we're trying to balance those various capital priorities we have, and this seemed like about the right kind of balance. Dennis, do you want to add to that?

[Dennis R. Vigneau:]

Sure. Paul, maybe to just give you some background on the decision there. To remind everyone, we got back $270 million of capital from Fireside. We used a little bit of that last year as we took lower dividends out of the operating companies for just normal dividends and debt service. And between last year and this year, we'll have -- we'll use a targeted $125 million of that $270 million for share repurchase. That would leave the holding company somewhere just from net Fireside proceeds with about $120 million at the end of the year. We like where the solvency ratios are in the operating companies. We're watching those. We want to make sure that we've got adequate capital to grow in those areas where we're working quite hard to grow. And at this point, we feel comfortable with the balance. We've struck between dividends, share repurchase and keeping some capital available for growth, whether organic or through acquisitions, should something come through that we find an attractive addition to the portfolio.

[Paul Newsome:]

Separately, could you talk about the timescale on the Property and Casualty side for getting to your targeted loss ratios? Are we talking 6 months, a year, 2 years, 5 years? Because I know oftentimes people put in caps into how much they'll raise rates in the filings, so that it could be a multiyear period. How is that working for you?

[Donald G. Southwell:]

Well, Paul, we certainly do look at caps in some places. By and large, we're being pretty aggressive with our rate increases with the goal of getting to rate adequacy that would allow target loss ratios pretty quickly. The countervailing pressure here would be if -- severity and frequency. Severity trends in the industry are up a little bit, particularly for liability on the auto side. And if frequency were to start to march upwards, that could set the whole industry back in progress on loss ratios, including us. But assuming a benign trend, we should get there pretty quickly.

[Paul Newsome:]

Any thoughts on -- now, I don't want an exact quarter, but are we talking about 1 year or 5 years or someplace in between?

[Donald G. Southwell:]

I'd say someplace in between, closer to 1 than 5, but someplace in between.

[Operator:]

[Operator Instructions] Next question is from Chris Leikhim of William Blair.

[Chris Leikhim:]

I just had a quick follow-up just on your last comment about severity. Could you guys give a little bit more color on the frequency and severity trends in your Kemper Preferred books for the auto business?

[Donald G. Southwell:]

Sure. I'll hand that one off to Dennis for the answer.

[Dennis R. Vigneau:]

We had -- when you look at the Preferred book, manageable trends. We're not seeing any significant volatility in either area. We really saw more of that in the Specialty book in the current quarter. Relative to the severity was in -- what came through on our prior year development. And by and large, the activity we've seen has been reasonably manageable, and -- but we are watching it pretty closely. There are some signs in some areas where there could be a pickup, and we're watching it pretty closely. But when you -- we look at what we saw in the quarter, generally manageable and not anything that we were surprised by.

[Chris Leikhim:]

Okay, great. And then just a follow-up, are you -- what are you observing in the market in terms of rate for the auto book in the standard business right now, in terms of, sort of, the competitive environment?

[Donald G. Southwell:]

That varies quite a bit depending on location, but I would say standard competitors are starting to take some rate, probably in line with trend expectations.

[Chris Leikhim:]

Okay. And then just a modeling question, what was the average diluted share count at the end of the quarter?

[Donald G. Southwell:]

We're looking it up for you. It'll be just a sec.

[Dennis R. Vigneau:]

I've got 59.7 million.

[Operator:]

Our next question is a follow-up from Steven Schwartz of Raymond James.

[Steven D. Schwartz:]

A couple. Dennis, in your commentary -- and maybe this goes into what Paul was asking. In your commentary with regards to Direct, you said that although the loss ratio was in line with pricing, the expense ratio was not. So I guess it's a twofold question, what is pricing on the expense ratio? And how large do you think you need to be in that area in order to get there? That would be the first question.

[Dennis R. Vigneau:]

Sure. Well, overall, we're targeting to get in the 95, 96 for a combined ratio; 60, low-60s in there for pure loss. So expenses, certainly, other than LAE, just underwriting, below 30 to get to that profit level. In terms of volume, I'd say the book really needs to be -- to bear the current infrastructure, and I'll come back to that -- somewhere in the $300 million range. But again, we're not going to grow that book until we get a few more things under our belt, the 3 states, make sure that those are all cleaned up. And then in terms of actions that are currently under way, there were a number of acquisitions in the Direct business over the years. That team is working very diligently to consolidate systems, consolidate platforms. They've been pushing to leverage the shared services even more. And I think by the time we get to, say, the middle of 2013, by and large, those consolidations and platform efficiencies should be well under way and starting to come through. In terms of shared services, they leverage those along all of the areas that Don mentioned

[Steven D. Schwartz:]

Okay. And then I guess on the same topic, Don, you mentioned you'll be out of Michigan by year-end, you're no longer marketing in New York and Florida. Is the takeaway there that you are less than impressed by the no-fault reform in Florida?

[Donald G. Southwell:]

Steven, the no-fault reform is a really good step in the right direction. It doesn't solve all the problems, but it is a good solid step in the right direction. We would like to see much better experience in Florida before we would be ready to resume.

[Operator:]

We have no further questions at this time. I'd like to turn the call over to management for any closing remarks.

[Diana J. Hickert-Hill:]

Thank you, operator. This is Diana, and if anybody has any follow-up questions, please feel free to contact me directly. This concludes our call.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.