Kemper Earnings Call Nuggets: Direct Details and Loss Ratio Outlook
Kemper Corp (NYSE:KMPR) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.
Miranda Davidson – Raymond James: I was wondering, if we could talk a little bit more about Direct. If I remember correctly, you were getting out of everything, but the affinity group. Can you add some color as to where you are in that process?
Denise I. Lynch – Property & Casualty Group Executive President, Kemper Preferred: The Direct runoff is going very well. We have the direct-to-consumer run off that is proceeding as expected with the renewal book. The new business is down as we would have expected. The overall direct-to-consumer business is performing well. The affinity book we continue to maintain and will invest in as we have the opportunity.
Miranda Davidson – Raymond James: Well, margins are looking pretty strong. Have you revisited the possibility of potentially selling the segment?
Donald G. Southwell – Chairman, President and CEO: We continually get some enquiries around selling the business, but it is of considerable value to us to keep it both in terms of profits we expect to harvest as well as some fixed cost coverage. We don’t anticipate a sale.
Miranda Davidson – Raymond James: One another thing if I could. Regarding the sale of your building, what are your plans for the proceeds? Is that also towards the repurchases that you mentioned or did you have something else in mind?
Donald G. Southwell – Chairman, President and CEO: It is general corporate money. We’ve got a considerable amount of liquidity and it doesn’t really affect our repurchases one way or the other. Frank, do you have any comments you want to add?
Frank J. Sodaro – SVP and CFO: The only thing I would add is that with the proceeds we had to pay off a mortgage that was taken out on the building with Trinity. So that will come right off at the top, but other than that…
Loss Ratio Outlook
Adam Klauber – William Blair: Couple of different questions. Preferred auto, obviously you’re doing a lot to that business, but the market conditions are still challenged. Do you think we will see more of a turnaround in the loss ratio in 2014 or are we going to see some evidence in ’13?
Denise I. Lynch – Property & Casualty Group Executive President, Kemper Preferred: We are working hard and our Preferred business segment that turned around that auto book of business. The quarter we experienced some adverse pure premium trend, but we are working hard with rate increases. As I mentioned, we’re filing about 9% this year on top of the 8% last year. We’re working hard on our segmentation and our risk selection, and how we’re managing our new business flow consistent with our underwriting guidelines. So what I would say is that we are working hard on this book of business and would expect to see this business improve over time.
Adam Klauber – William Blair: I’m sorry if you said this before, but what was the retention in that book this quarter versus a year ago?
Denise I. Lynch – Property & Casualty Group Executive President, Kemper Preferred: The retention of the auto book of business is actually down slightly compared to where we were a year ago. In the auto book of business on a premium basis it’s actually holding pretty nicely, but on a policy basis, we’re giving up some retention there.
Adam Klauber – William Blair: That’s what you’d expect.
Denise I. Lynch – Property & Casualty Group Executive President, Kemper Preferred: Right.
Adam Klauber – William Blair: On the homeowners, clearly, you’re beginning to see results. But given that that’s been a challenging line, not just for you, but for the industry, do you think you need to hit that with a fair amount of rate in 2014 on top of what you’re already doing this year?
Denise I. Lynch – Property & Casualty Group Executive President, Kemper Preferred: It’s our expectation to continue to manage that book of business until it meets our desired return. As I said before, this year we are expecting to file pretty substantial rate increase of about 14%. That’s higher than our original plan of about 10%. We’re managing that book of business with other coverage condition changes, risk selection issues and cat management, and we’ll watch the trends there and continue to take the actions that we need to get the results that we expect…
Adam Klauber – William Blair: Then as far as we look at Specialty or, what I call, non-standard segment. How is the competition in that market? Are you seeing – traditionally you have some MGAs with fair amount of capacity, and then you have some large nationals, you have some regionals. I guess, what are the different competitive forces doing right now?
Denise I. Lynch – Property & Casualty Group Executive President, Kemper Preferred: Generally, I’d say that in our non-standard book of business what we’re seeing, our Specialty book of business what we’re seeing are firming market condition. Now, naturally its variable by geography, but overall what we’re seeing in firming market conditions with most competitors taking rates across the country.
Adam Klauber – William Blair: Sorry if you said this, but with the sale of the building, are those funds already at the holding company or are they at one of the subsidiaries?
Frank J. Sodaro – SVP and CFO: They are not directly at the holding company, but they’re not in the insurance subsidiaries either. So it’s a company right beneath the parent.
Adam Klauber – William Blair: I’m not sure if you said; you mentioned a gain, but as far as actually funds, you mentioned they’d pay off a mortgage. So what’s the resulting funds that you actually get after you pay off the mortgage?
Frank J. Sodaro – SVP and CFO: What will ultimately become available to parent will be somewhere in the range of $40 million to $45 million.
Adam Klauber – William Blair: So somewhat of a gain then?
Frank J. Sodaro – SVP and CFO: Correct.