Prepared remarks
Good afternoon, ladies and gentlemen, and welcome to Kemper's Second Quarter 2025 Earnings Conference Call. My name is Constantine, and I will be your coordinator today. As a reminder, this conference call is being recorded for replay purposes. I would now like to introduce your host for today's conference call, Michael Marinaccio, Kemper's Vice President of Corporate Development and Investor Relations. Mr. Marinaccio, you may begin.
Thank you. Good afternoon, everyone, and welcome to Kemper's discussion of our second quarter 2025 results. This afternoon, you'll hear from Joe Lacher, Kemper's President and Chief Executive Officer; Brad Camden, Kemper's Executive Vice President and Chief Financial Officer; and Matt Hunton, Kemper's Executive Vice President and President of Kemper Auto. We'll make a few opening remarks to provide context around our second quarter results, followed by a Q&A session. During the interactive portion of the call, our presenters will be joined by Chris Flint, Kemper's Executive Vice President and President of Kemper Life; Duane Sanders, Kemper's Executive Vice President and Chief Claims Officer for P&C; and John Boschelli, Kemper's Executive Vice President and Chief Investment Officer. After the markets closed today, we issued our earnings release, filed our Form 10-Q with the SEC and published our earnings presentation and financial supplement.
You can find these documents in the Investors section of our website, kemper.com. Our discussion today may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, the company's outlook on its future results of operation and financial condition. Our actual future results and financial condition may differ materially from these statements. For information on additional risks that may impact these forward-looking statements, please refer to our 2024 Form 10-K and our second quarter earnings release. This afternoon's discussion also includes non-GAAP financial measures we believe are meaningful to investors. In our financial supplement, earnings presentation and the earnings release, we have defined and reconciled all non-GAAP financial measures to GAAP where required in accordance with SEC rules.
You can find each of these documents in the Investors section of our website, kemper.com. All comparative references will be to the corresponding 2024 period, unless otherwise stated. I will now turn the call over to Joe.
Thank you, Michael. Good afternoon, everyone, and thank you for joining us today. I'm pleased to report that we delivered another quarter of strong underlying operating results. This was led by our Specialty Auto business, which once again produced a solid underlying combined ratio and meaningful year-over-year PIF growth. Before we dig into the specifics of our results, I'd like to provide some context around the overall auto market competitiveness and more specifically, the specialty auto segment. I believe we're all aware that there's been a hard market for auto in general. Over the first half of this year, there's been clear evidence that markets are softening and reverting to more normalized conditions. As most carriers see combined ratios recovering to more acceptable profitability levels, they're not taking major rate increases. In some cases, they're decreasing rates and increasing underwriting appetite to more aggressively compete for new business.
The result is a combination of reduced consumer shopping and more available options when they do shop. Accordingly, the high levels of growth seen by the strongest players are naturally normalizing to more traditional levels. Most of us in the industry think and talk about hard, normal and soft market conditions. These descriptions work overall for commercial lines as well as the standard and preferred personal auto market, but they don't really work for the specialty auto segment. As I stated in the past, within specialty auto, you generally see either a hard market or a more normalized market. Overall, we don't typically experience a traditional soft market because of our segment's unique characteristics. First, there are many smaller competitors who only operate in a few local geographies. Second, the speed of loss development is typically faster than the standard market. And third, customer policy lifetime tenures are much shorter than the standard market.
The combination of these characteristics has several implications. You can't recover short-term irrational pricing over the lifetime of a customer. Aggressive pricing is seen in results more rapidly and no single competitor can typically soften the overall market with irrationally aggressive activity. In specialty auto, we may experience short-term softness in select geographies, but in general, it does not last long or impact the overall market. Recall our competitive advantages. We deliver a low-cost value proposition tailored to our unique customer needs. We bring a distinct scale advantage and a deep understanding of our market. This enables us to deliver leading differentiated product sophistication, claims effectiveness and ease of use. We are confident that our competitive advantages will continue to produce attractive long-term profitable growth in a more normal market environment.
With this as a backdrop, let's move to Page 4 and jump into this quarter's financial results. We delivered a return on adjusted equity of 15%, adjusted book value per share growth of 14% year-over-year and an all-time high trailing 12-month operating cash flow of nearly $600 million. Our core businesses continue to perform very well. Specialty Auto generated a 93.5% underlying combined ratio, while producing 8% year-over-year PIF growth and earned premium growth of 17%. Our Private Passenger Auto business produced an underlying combined ratio and year-over-year growth better than long-term norms but was somewhat off the hard market highs. Our Commercial Auto business continued to perform well, and produced an underlying combined ratio of 90%, while growing PIF by 18%. Here, we reported adverse prior-year development of approximately $19 million, which was driven by the general effect of social inflation.
When viewed over a rolling 4 or 8 quarter basis, this business consistently produces attractive combined ratios and growth, and is a source of continued reliable strength. The performance of our alternative investments negatively impacted both our Specialty Auto and Life segments. This quarter, we had some modest noise, which I generally categorize as consistent with the broad marketplace investments volatility. We continue to maintain a high-quality investment portfolio, and Brad will get into the specifics around this shortly. The business fundamentals underlying our Life segment remain stable. The business continued to produce a strong return on capital and distributable cash flows. Lastly, we continue to execute on our multi-quarter balance sheet strengthening. Last quarter, we retired $450 million of debt, bringing our debt-to-cap ratio near our long-term target and our cash flow from operations hit an all-time high.
With a strong balance sheet and healthy liquidity, we've repurchased $80 million of common stock since April 1. Given our expectations around future growth and strong operating metrics, the Board approved an additional $500 million of repurchase authorization, bringing the total available to $550 million. Brad will discuss our financials and share repurchases in more detail. Overall, we're pleased with our second quarter results. With that, I'll turn the call over to Brad.
Thank you, Joe, and good afternoon to everyone. I'll begin with our financial results on Page 5. For the quarter, we reported net income of $72.6 million or $1.12 per diluted share, and adjusted consolidated net operating income of $84.1 million or $1.30 per diluted share. These results led to an attractive return on adjusted equity of 14.9% and growth in adjusted book value per share of 14.3% year-over-year. As Joe discussed, our businesses continue to deliver strong underlying performance. Specialty Auto produced strong growth in policies in force and earned premium, and the Life continues to provide steady returns. Overall, our core businesses are performing well, but this quarter, our results were impacted by a few infrequent items. First, Specialty Auto recorded $14 million in adverse prior-year development driven by a $19 million reserve increase in our Commercial Vehicle business.
This was primarily related to bodily injury losses. Second, volatility in our alternative investment portfolio pressured net investment income. Let's turn to Page 6 to discuss the investment portfolio in more detail. Quarterly net investment income totaled $96 million, coming in below expectations due to lower returns from alternative investments. Not surprisingly, performance in this asset class can be volatile. Valuation gains tend to align with marketplace deal activity, which slowed in the second quarter amid broader macroeconomic pressures. As market conditions stabilize, we expect alternative investment performance to improve in the coming quarters. The core portfolio, which excludes alternatives, continues to perform well, delivering $98 million of net investment income this quarter. Overall, we continue to maintain a high-quality, well-diversified investment portfolio. As the investment portfolio grows and with favorable new money rates, we anticipate net investment income to rebound in the second half of the year, averaging approximately $100 million to $105 million per quarter.
Moving to Page 7. Here, we highlight the strength of our balance sheet and significant financial flexibility. We maintain $1.1 billion in available liquidity and continue to have well-capitalized insurance subsidiaries. Our debt-to-capital ratio stands at 22.7%, aligning closely with our long-term target. Notably, we generated $587 million in operating cash flow over the past year, marking an all-time high for the company. Given our strong financial position, let me remind you of our capital deployment priorities. First, we utilize capital to support organic growth. Next, we will fund inorganic opportunities to enhance our platform. And lastly, we will return excess capital to shareholders. As Joe discussed earlier, the Specialty Auto segment is transitioning to a more normal marketplace with attractive but somewhat slower profitable growth opportunities. This evolving environment will require less capital to fund organic growth.
With significant financial strength and flexibility and the belief our stock is trading below intrinsic value, we repurchased $80 million of common stock since April 1, leaving $50 million available under our current authorization. This week, the Board approved an additional $500 million share repurchase authorization, bringing the total amount for repurchase to $550 million. This will enable us to deliver on our capital priorities in this environment. That said, we have no preset timeline for share repurchases and plan to execute on them opportunistically. Finally, I want to reiterate that we're well positioned for sustained profitable growth. The strategic investments we made over the past 5 years have strengthened our capabilities and reinforce our confidence in driving shareholder value.
Thank you, Brad, and good afternoon, everyone. Turning to Page 8, our Specialty P&C segment produced another quarter of quality underlying results. This business generated a solid underlying combined ratio of 93.6%, up modestly from the first quarter, largely driven by normal seasonal patterns. Private Passenger Auto produced 94.5%, while Commercial at 90.1%. Overall PIF growth for the Specialty business was nearly 8% year-over-year. Directing our focus to private passenger auto, as Joe mentioned, the hard market in the specialty auto business has been receding and we are moving to an overall more normal competitive environment. As you would expect, each state is moving at its own pace. California remains a modestly hard market. Given its unique regulatory environment and the challenges that exist in other lines of business, we do not expect California auto to move to a fully soft market.
The marketplace is structured in a way that doesn't drive sustained irrational behavior. We are, however, seeing competitors increasingly reopen. Our products are well positioned and our scale and understanding of this unique state are enabling continued profitable growth. Florida continues to be a very competitive market. When we talked in May, we commented on some aggressive competitor actions and our plans to respond. That response came in June and had the intended positive impact of increasing new business. We saw the benefits in June, and they continued through July. We will continue to build on this momentum to drive profitable growth. In Texas, the market conditions continue to operate in a traditionally normal fashion, sitting somewhere between California and Florida. Our production has been steadily gaining momentum since we fine-tuned our pricing plans earlier this year. All other states continue to see attractive growth and profitability in normalizing market conditions.
Overall, we recognize the ongoing market dynamics and are proactively positioning ourselves for long-term profitable growth. Shifting to Commercial Auto, this business again saw very strong underlying profitability with PIF growth of nearly 18%. The market backdrop remains consistent and success in this line requires a deep understanding of underwriting dynamics. Our long-term competitive advantages continue to position us well to capitalize here. We are confident in our ability to profitably grow this business. Again, overall, we are positioning ourselves to compete in a more normalized market environment. That said, as a reminder, Specialty Auto has a more pronounced seasonal shopping pattern than standard auto. Customer shopping activity decreases in the second half of the year, particularly in the fourth quarter. This is normal, and we anticipate that it will occur this year. With that said, the business is delivering solid profitable growth enabled by our competitive advantages, scale and focus. We are in a position of strength and remain optimistic in our long-term outlook.
Thank you, Matt. Turning to our Life business on Page 9. As noted earlier, the underlying business continued to generate stable operating results. Mortality and persistency remained in line with historical trends, and the Life business continues to generate strong return on capital and distributable cash flows. Turning to Page 10. In closing, I'd like to reiterate our highlights for the quarter. First, Kemper delivered solid operating results with an adjusted ROE of 15% and year-over-year adjusted book value per share growth of 14%. Specialty Auto continued to produce strong underlying results with solid year-over-year PIF growth and an underlying combined ratio of 93.6%. Our competitive advantages continue to give us confidence in our ability to navigate the normalization of the auto market. And finally, our capital and liquidity position provides significant financial flexibility. Our debt-to-cap ratio is near our long-term target range.
Operating cash flows hit an all-time high. We repurchased $80 million of stock since April 1 and now have the authorization to repurchase up to another $550 million. I want to take a moment to thank our entire Kemper team for their efforts. These results would not be possible without their commitment and hard work towards achieving our goals. We remain confident in our ability to create long-term shareholder value. With that, operator, we may now take questions.
Questions and answers
Your first question comes from the line of Andrew Kligerman from TD Cowen.
So the first question is around PIF growth and pricing, kind of a dual question. With written premium up 7% and PIF up 8% year-over-year, the question is, one, does that imply pricing came down? And could you give color on that? And two, PIF is actually down 70 basis points sequentially. Are you kind of putting the brakes on things a little bit as we move into the second half?
Sure, Andrew. This is Joe. I'll address your questions. There are a couple of points to clarify. The difference between PIF and written premium is relatively minor and is mainly due to geographic mix. There hasn't been any significant change in premium rate filings. While there are some small changes in specific regions, they aren’t substantial and I consider them more of an anomaly. Historically, we've discussed year-over-year PIF growth and advised you not to focus on sequential quarters, as there are seasonal variations in Specialty Auto. We highlighted a sequential PIF quarter when we shifted from decline to growth to indicate a material change, rather than a rolling four quarters perspective. We're past that discussion from last quarter. If you concentrate on sequential PIF growth, you'll get caught up in seasonal issues. Matt mentioned earlier that the second half of the year sees notable seasonal differences compared to the first half, which is typical and has been the case for the last 20 years, and we expect that to continue.
This is not us slowing down; we're still actively engaged and anticipate being a profitably growing business. What you're observing in PIF aligns with what many of our competitors are seeing. As an industry, we're transitioning from a hard market to a more standard market. The double-digit growth rates experienced over the past year or so are not sustainable long-term; they are anomalies of a hard market. Progressive, for instance, emphasized this point in their call, and we're competing in those same markets. Insurers are becoming more active again, which will lead to a normalization of that rapid growth. We believe that in a standard Specialty Auto environment, a low to mid-single-digit PIF growth year-over-year is expected. This translates to a growth range of about 3% to 7%, depending on the specific 90-day period. From a long-term PIF view, we anticipate maintenance rates will continue to flow through the system.
As mentioned before, combined ratios are expected to gradually align back to the long-term range of 93.5% to 95%. Just as a reminder, if we look back pre-pandemic, in the years 2017 to 2020, a 93.5% combined ratio and 8% PIF growth would have been considered fantastic results. These are appealing numbers for a stable market, but they seem less favorable when compared to the exceptionally high figures we've seen, which we’ve indicated will not persist. It's not that we don't want them to continue; it's just that the market will normalize, and competitors will enter. So, we are not slowing down in any way.
That was super helpful, Joe. And then just my follow-up is around your confidence in the loss results going forward. So Private Passenger Auto at 94.4% calendar year is getting close to that 95%. Do you think you could hold it there? And then with the $19 million-ish charge in Commercial Auto, are you confident that you've kind of nipped it and we won't see much, if anything, there going forward?
I'm going to separate those into two different areas. Our general combined ratio guidance is typically in the range of 93.5% to 95%. If it exceeds 95%, we don't overly worry for a quarter or two. We have a strict limit at 96%. In this industry, it's common to have fluctuations of 50 to 70 basis points each quarter. I expect us to stay within that range and don't have concerns about a single quarter reaching the upper threshold; it should remain stable there. The second point pertains to the $19 million we mentioned, primarily in Commercial Vehicle. We noticed a slight increase in various accident years, likely due to what the industry refers to as social inflation. We adjusted our balance sheet to account for that. It was an unusually active quarter, prompting us to implement adjustments. This includes our current accident year estimates in both Commercial Vehicle and Private Passenger Auto to reflect that situation.
In Private Passenger Auto, we expect some seasonal normalcy in the second quarter, which is typical for it to rise a bit, alongside our adjustments for the current accident year in light of that environmental influence. We believe we have addressed it correctly. Could there be some variability in any given quarter? Yes, possibly. However, in discussing Commercial Vehicle, it seems that every four to eight quarters, we encounter one or two that show a noticeable spike. When assessed on a rolling four to eight-quarter basis, this remains a very promising sector for us. We have substantial confidence in it, and we react appropriately to any unusual fluctuations in individual quarters, but it doesn't alter our fundamentally positive outlook for that business.
The next question comes from the line of Mitch Rubin from Raymond James.
This is Mitch on behalf of Greg Peters. So I wanted to ask about the higher minimum limits in California. And I was wondering if you could quantify the impact on premiums this quarter.
Sure. The minimum limits in California would have had a similar impact to what we observed in the first quarter. Our policies are typically six-month policies, so that effect will have largely worked its way through by now. This is the last quarter that anomaly will have occurred. I apologize, Mitch, but we'll need to get back to you with the specific number on that. I believe I have an estimate in mind, but I may be a bit off. We'll follow up with you. The situation is consistent with what we saw in the first quarter, and since nearly all our policies in California are six-month, the impact has already been accounted for.
All right. My follow-up is on retention and how that's been differing by state.
Yes, Matt, why don't you go ahead and take a shot at that.
Yes, the texture varies a bit by state. We previously discussed California, where the market remains relatively firm. There is limited supply compared to historical trends, so retention is generally stable in that area. In Florida, we are noticing a slight decline in policy life expectancy, which is normal as agents adjust their portfolios due to changes in carrier premiums. However, this is not significantly affecting our outlook for the state. Texas remains stable, with decreased shopping in the market recently, which is expected to level off as business continues. Overall, retention has been quite steady.
The next question is from Paul Newsome from Piper Sandler.
One maybe follow-up on the adverse development. Was there anything besides just severity going up? Like was there any geographic pattern to it? Was there anything just purely liability-related things? Or was there some health care inflation in there? I think you said bodily injury. Just want to make sure we got all the pieces there on the adverse development.
Sure, Paul. This is Brad. Great question. Specifically in CV BI, the adverse development is coming from our large loss bucket, which has a low frequency of occurrences but high severity in terms of coverage. It's essential to clarify this, as it's not related to underwriting. We haven't seen a significant rise in frequency; rather, it's primarily due to social inflation over time. These cases typically develop over a period of 2 to 3 years. In the more recent accident years, we've bolstered our balance sheet as a result. Overall, the business continues to perform exceptionally well, with substantial year-over-year growth and an underlying combined ratio in the low 90s, which is very strong. We're experiencing more episodic large loss events and, as Joe mentioned, there has been an uptick in litigation activity in the second quarter compared to previous periods.
And then a related question and a big-picture question related to the combined ratio thoughts that you had over the cycle. We're kind of in the zone for a normal underwriting profitability. And I think we're sort of in the zone from a debt-to-capital perspective; are there pieces there that would suggest that maybe this is sort of essentially in the zone for return on equity as well? Or is there some possibility for improved ROE or a little way over the cycle?
Yes, there are always some fluctuations in this area, Paul. We examine our adjusted return on equity because there is a substantial amount of goodwill on the balance sheet, approximately 15%. This is considered an attractive position. I believe it can and has increased over time, and it currently sits in a reasonable range with some anticipated volatility. Additionally, I want to highlight the significant share repurchase authorization that the Board has approved. At $500 million, it matches the last two authorizations combined. When factoring in the remaining $50 million and the $80 million we repurchased in the last 90 days, this amounts to about 16% of the company’s current market capitalization. This presents a considerable opportunity. We are confident in the returns from this business, our balance sheet remains strong, our liquidity is healthy, and we believe the stock is somewhat undervalued. We plan to buy opportunistically and actively defend our position in the market, as we see potential upside that has yet to be recognized.
There are no further questions at this time. I'd like to turn the call over to Joe Lacher for closing comments. Sir, please go ahead.
Thank you again, everybody, for your time and your attention. We look forward to talking to you next quarter and look forward to continue to be strong, thoughtful competitors in the marketplace.
Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.