Kemper Earnings Call Nuggets: Timing of Returning Capital and Organic Growth
Kemper Corp (NYSE:KMPR) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Timing of Returning Capital
Paul Newsome – Sandler O’Neill: I want to ask about how the sort of the mechanics of the timing of returning capital from the Direct business, exactly how would that work?
Donald G. Southwell – Chairman, President and CEO: Well, Paul, I’m going to ask Dennis to answer that question, but the basic answer is as the business runs off, the capital needed to support it frees up.
Dennis R. Vigneau – SVP and CFO: We expect that capital based on our current runoff projections to – majority of that would come out over the next two to three years and it’s comprised of as you can imagine a few different pieces, there is, which you’d expect in terms of allocated required capital surplus for the book of business that’s there, that will wind down and then in addition to that, there are other intangible assets, licenses, et cetera, that also have value and as the book runs off those companies, we would expect to monetize those that we don’t intend to use going forward.
Paul Newsome – Sandler O’Neill: So, you (indiscernible) the piece that – that you (need) those intangibles you’re talking about (sign)?
Dennis R. Vigneau – SVP and CFO: Yeah, those are the legal entity (shows) and licenses that – to the extent we don’t use them in the ongoing businesses elsewhere we would monetize those. That’s right. We’ve done in the past on a number of occasions.
Paul Newsome – Sandler O’Neill: So, is it kind of the business runs off as we look at it as (pre-M) and in the following year we’re able to dividend the cash out is I think kind of how it works.
Dennis R. Vigneau – SVP and CFO: When you think about the capital that’s behind the business, it’s in the ballpark of $160 million at this point. That’s our internal allocated capital and everything else that’s not allocated to support the business just automatically is freed-up and available either for redeployment behind the other P&C business lines or to the extent we want to take a dividend out of the P&C businesses and bring it up to the holding company, we could chose to do that.
Ray Iardella – Macquarie: Maybe just going to sort of sticking on the capital question, and I know you kind of talked about the three priorities, but I guess, sort of just breaking them down a little bit further, organic growth; I’m just kind of wondering, I mean what type of return do you think you can get on that, and it just feels to me just given where valuation is, maybe the better return would be to increase the share repurchases. Any thoughts on that?
Donald G. Southwell – Chairman, President and CEO: Organic growth is always on our list because profitable organic growth is the best use of capital. As we look into 2013, we are not anticipating that we will be in growth mode, in fact we may well continue to be in shrinkage mode with the run off of Direct and with intense emphasis on margin improvement. So, while it’s our first priority that doesn’t mean we anticipate, we are going to deploy capital this year. So, we certainly do have capital available to return to shareholders and our dividend is important to our shareholders and is competitive. And we want to certainly maintain that and be opportunistic on capital return through the share buyback.
Ray Iardella – Macquarie: And I guess going back to the Direct business, I mean how should we think about premiums going through 2013. I mean so is it there is just going to be zero going to written and then whatever earn gets earned out and then you guys are just paying the losses as they payout overtime. Is that the sort of the right way to think about that?
Donald G. Southwell – Chairman, President and CEO: I’m going to ask Denise to elaborate.
Denise I. Lynch – Property & Casualty Group Executive President, Kemper Preferred: Okay, I will add a little bit more information to that. We have discontinued our marketing efforts to solicit new business. Having said that new business will continue to come in to us and we will accept that where it is appropriate. So, there will be some new business coming in, although just a small percent of what we have seen historically. And we will continue to renew business as appropriate. But overtime this book of business will continue in its runoff the direct-to-consumer business that is.
Ray Iardella – Macquarie: Then maybe just talking about the Specialty business and I think there was some severity trends that drove the accident year high. I mean is there anything in particular you guys are noticing in that book of business and then I guess as though the way to combat it’s sort of just continued push of rate or is there anything else you guy can do?
Donald G. Southwell – Chairman, President and CEO: Denise you want to take that one?
Denise I. Lynch – Property & Casualty Group Executive President, Kemper Preferred: Yeah. I’d be happy to take that one. Our Kemper Specialty book of business, you are right. We are watching those loss trends pretty carefully. Over time, we’ve experienced about 3% to 4% loss trend. In the last year, we saw increased frequency and increased severity in that book of business and I’m talking specifically about the private passenger book because that is majority of our book. Where we are seeing the increased frequency is on the comp and collision and where we are seeing the severity trend is on (BI) and also on the comprehensive coverage. We are addressing it aggressively. We are addressing it with rate. As we said before we filed rate essentials of about 10% last year. We’ll continue to file additional rate in the coming year, but in addition to rate, we are addressing it with continued underwriting efforts and improving our segmentation and the pricing of the product. So, there is a lot of ways we are going at it with rate, with underwriting and improving our product.