管理層發言
Good morning, ladies and gentlemen, and welcome to Kemper's Second Quarter 2026 Earnings Conference Call. My name is Samantha, and I will be your coordinator today. Operator instructions were provided. 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 morning, everyone, and welcome to the conference discussion of our second quarter 2026 results. This morning you'll hear from Stephen McAnena, Kemper's President and CEO, and Bradley Camden, Kemper's Executive Vice President and Chief Financial Officer. 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 our call, our presenters will be joined by Chris Flint, Kemper's Executive Vice President and President of Kemper Life, and John Boschelli, Kemper's Executive Vice President and Chief Investment Officer. After the markets closed yesterday, 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 investor 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 2025 Form 10-K and our second quarter earnings release. This morning's discussion also includes non-GAAP financial measures we believe are meaningful to investors. In our financial supplement, earnings presentation, and earnings release, we've 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 investor section of our website, kemper.com. All comparative references will be to the corresponding 2025 period unless otherwise stated. I'll now turn the call over to Steve.
Well, thanks, Michael, and good morning, everyone, and thank you for joining us. Since joining Kemper two months ago, I've spent time with employees, agents, business partners, and members of the investment community. Those conversations, combined with the work I've done to better understand the business, have energized me about Kemper's future. I see a company with meaningful strengths, including the stability of life, the momentum within commercial auto, real potential for personal auto, and a talented team committed to improving results. Together, these strengths position us to deliver long-term shareholder value. At the same time, we have to be candid about where performance must improve. The clearest example of this is personal auto, where we are not delivering target returns, driven in large part by our concentration in California. We're addressing this, but the benefits of our actions will take time to flow to our results. These realities have shaped how I think about the business and the priorities that will drive success. Stepping back, there are three messages I want you to take away from this discussion. First, restoring profitability is our most important priority. I want to be very clear on this point. We do not view profitability and growth as competing objectives. Profitability is a prerequisite for growth. And as such, growth will be earned, not chased. In commercial auto, that means despite strong top and bottom line performance, we will take a more disciplined stance given successive quarters of prior year adverse development. We're making intentional adjustments moving forward to ensure growth is profitable and sustainable. Second, Kemper has the foundational elements necessary for long-term growth. Our focus is on improving performance and delivering more consistent results. Unlocking that value requires clearer accountability and more consistent execution. And that brings me to my third takeaway for stakeholders. We've realigned the P&C organization to improve accountability and execution. Underwriting, pricing, product, and claims are now under one P&C leader, Eric Kappler. We believe this structure will create sharper accountability, faster decision-making, and ultimately better execution. Eric's deep experience in non-standard auto makes him well-suited to lead this work. We look forward to introducing him at our next earnings call. I also want to officially welcome Tony DeSantis to our Board of Directors. Tony brings over 40 years of experience in our industry, including 10 in non-standard auto. He's already been a great addition to the board and I look forward to his counsel and contributions. Taken together, these three points define our path forward. Restore profitability, unlock the value in our business, strengthen leadership and accountability to deliver more consistent results. Against that backdrop, this quarter shows encouraging progress while also highlighting the work still ahead. For the quarter, underlying results improved sequentially while reported GAAP results were adversely impacted by a goodwill impairment. Brad will cover the numbers in detail, but first I wanted to share my perspective on each of our businesses. Within personal auto, rate and non-rate actions improved our combined ratio while also reducing our concentration in California. This is great progress, but as I said, meaningful work remains. Commercial auto continues to generate strong underlying results. But the business is not without challenges. The prior year reserve strengthening reinforces the importance of maintaining discipline as the business grows. While we continue to see attractive opportunities ahead, we'll be placing greater emphasis on profitability by taking more rate and tightening our underwriting, even if that results in less growth in the near term. And finally, life continues to provide stable earnings, consistent cash flow, and valuable diversification. Building on that foundation, we continue to advance our distribution and lapse management initiatives in support of profitable new business growth. In summary, our path is clear. Restoring profitability is our top priority, and achieving that goal will earn us the right to grow. My confidence in our path forward is grounded in both the actions underway and the strength of our people. I feel incredibly fortunate to work alongside this management team and our talented employees across the country. I am grateful for their commitment, and I'm looking forward to working with them and building a stronger Kemper. Thank you and with that I will turn the call over to Brad.
Thank you, and good morning, everyone. Steve discussed the progress we're making to restore profitability, the actions underway to improve execution, and the underlying strengths of the businesses. I will provide additional perspective on our financial results, our capital position, and the operating trends we're seeing across the enterprise. Let me begin with our financial results. This quarter reflected sequential improvement in underlying operating performance, although our reported GAAP results were significantly impacted by two items that I'll discuss in more detail shortly. Net loss was $464.8 million or $7.90 per share, while adjusted consolidated net operating income was $26.3 million or $0.45 per share. Underlying operating results improved sequentially driven by P&C underwriting performance, expense discipline, and stable earnings from the Life business. Net investment income totaled $105 million and trailing 12-month cash flow was $434 million, reflecting the consistent cash generating ability of our businesses. Before discussing the quarter in more detail, let me provide additional context on the items that affected our reported results. The primary driver of our reported net loss was a $460 million non-cash goodwill impairment in our specialty auto segment. Recent operational challenges and a subsequent decline in our share price triggered a quantitative goodwill impairment evaluation under GAAP. The resulting impairment reflects an estimate of fair value based in part on our second quarter share price. Let me emphasize that this does not affect the ongoing operations or cash generating ability of the businesses. While significant from a GAAP perspective, the impairment has no impact on our statutory capital, holding company liquidity, or compliance with our debt and revolving credit covenants. We also recognized a $16.6 million after-tax allowance for credit losses related to the surplus notes issued by Kemper Reciprocal Exchange. Based on our assessment of the expected recoverability of those notes under GAAP, we recorded an allowance during the quarter. Similar to the goodwill impairment, this charge does not affect our insurance subsidiary statutory capital or holding company liquidity. With that context, let me turn to our balance sheet and capital position. Our balance sheet remains a source of strength. Insurance subsidiaries are well capitalized and we ended the quarter with $766 million of holding company liquidity. While our debt to capital ratio increased to 28.3%, that change was primarily driven by the goodwill impairment and does not reflect a deterioration in liquidity or statutory capital. Our investment portfolio performed well, generating $105 million of net investment income during the quarter. It continues to provide a stable and predictable source of earnings. I'll now turn to the operating performances of our businesses. I'll begin with our specialty auto segment, which includes both our personal and commercial auto businesses. Underlying results improved sequentially with the normalized underlying combined ratio improving 0.8 points from 102.8% to 102.0%. Within personal auto, the normalized underlying combined ratio improved 1.3 points from 106.5% to 105.2%. The improvement reflected stronger underwriting performance and continued expense discipline. As part of our profit restoration strategy, California's share of the personal auto portfolio declined by 2.5 percentage points during the quarter. That was driven by a 10% sequential decline in policies in force, along with continued growth in other markets. Turning to commercial auto, the business delivered strong underlying performance with an underlying combined ratio of 93.7% while PIF increased 9.2% year-over-year. Reported results, however, were impacted by $17.7 million of prior year reserve development. As Steve mentioned, the prior year reserve strengthening reinforces the importance of maintaining discipline as the business grows. Accordingly, we are taking additional rate actions and adjusting our underwriting standards. While these actions will temper growth in the near term, we believe they are prudent and position us to build on our underlying momentum and deliver stronger, more consistent profitability over time. And finally, our life business delivered another solid quarter, generating $18 million of net operating income, supported by growth in earned premiums, favorable mortality and lapse experience, and higher net investment income. Earned premiums increased to $103 million, while average premium per policy increased to 5.4% from the prior year period, reflecting the benefits of our pricing, underwriting, and distribution initiatives. Importantly, life continues to provide stable earnings, consistent cash generation, and valuable diversification for Kemper. Before I conclude, I'd like to provide an update on our restructuring program. Since announcing the initiative last October, we've identified more than $80 million of cumulative annualized run rate savings, an increase of $20 million since last quarter. While we continue to identify additional opportunities to improve our cost structure, the actions we've taken are contributing to improved financial performance, including lower expense and LAE ratios. Overall, the quarter demonstrated progress toward restoring profitability. While our GAAP reported results were significantly impacted by two items discussed earlier, underlying operating trends improved. As Steve emphasized and I'll reiterate, restoring profitability is our top priority. This quarter reinforces that our actions are gaining traction while preserving the financial strength needed to execute our strategy and create long-term value for our shareholders. With that, Operator, we'd be happy to take questions.
分析師問答
Operator instructions were provided. Your first question comes from the line of Gregory Peters with Raymond James. Gregory, your line is open. Please go ahead.
I think the great place to start is, Steve, as you're moving through the organization realigning the executives. At the end of the day, it's the pricing and the underwriting that's going to drive the improvement. So maybe you can provide us some additional detail on how you're changing the pricing and the underwriting backbone of the company to give better results. And I'm particularly interested in California where, obviously you're shrinking and it's a difficult market to get rate increases through.
Hey Greg, thanks for the question. If I can play it back, I think your question was organizational in nature. The big aspect of the organizational change was aligning claims with the rest of the business. If I'm being candid, I feel like the things we were doing on the underwriting and pricing side prior to my joining were pretty effective. There are a couple of areas we can speed up and be a bit more aggressive, but from my perspective they were pretty effective. Pulling back to the levers we're using across the company, with no emphasis only on California, we are taking rate. The team moved quickly after the minimum limit change and we followed it up with another filing recently. The speed and urgency were where we needed them to be, and we were aggressive. Second, as part of that, we slowed down new business anywhere where we thought the calendar year impact would be adverse. Again, the team acted decisively and we're seeing positive results. Brad commented that California share came down. Finally, expenses are an enterprise-wide effort, not just underwriting or pricing. As Brad said, we have made progress there. So, the primary aspect of the change was aligning claims with the rest of the organization. We're making progress on the levers at our disposal. Teams are moving quickly and, most importantly, we're seeing actions bear fruit in our results, so we feel pretty good about that. Brad, I'll turn it to you to add anything I missed.
I'll just add to Steve's comments, Greg, and good morning to you. As Steve mentioned, we have made some significant progress. We got rate effective in California in a quarter, probably averaged between two of our programs about 5.5% beginning to earn in. We filed another 6.9%, and we continued to take non-rate actions, which you can see through the reduction in PIF growth quarter-over-quarter. We like what we're seeing. We're seeing modest sequential improvement and we expect over time for that to improve over the coming quarters. I'll leave it there. Turn it back to the operator.
I have a follow-up question if that's okay. I wanted to touch on the goodwill charge. If you can walk us through the mechanics of that, because I know you still have some goodwill on the balance sheet, I'm trying to understand how you came at the number and whether a continued lower stock price will result in continued quantitative analysis every quarter on goodwill. Can you give us an update there, please?
Yes, sure. Thanks for the question, Greg. Our goodwill impairment was triggered by the sustained decline in our stock price over the past year. Kemper's down roughly 50% year-over-year and roughly 30% year-to-date, and that required a quantitative goodwill impairment assessment under GAAP. When you evaluate goodwill you use multiple methods. One is a cash flow method and one is a market value approach which uses public market valuations. When you look at our tangible book value relative to book value and you look at the valuation of the fair value of our specialty auto segment, given the valuation and some control premiums, we could no longer support the book value on our books. We recorded a $460 million goodwill impairment that brings our specialty auto segment goodwill down to about $570 million. Going forward, another sustained decline in our share price would require another quantitative goodwill impairment, but that's not the only trigger—it also depends on operating results. As we mentioned earlier, our operating results are improving and we expect further improvement. Continued decline in our share price or challenged operating results could result in additional impairment. As we see it today, we're comfortable with the position. There was no adjustment to the life segment this quarter.
Your next question comes from the line of Paul Newsome with Piper Sandler. Paul, your line is open. Please go ahead.
I wanted to touch on the $16.6 million write-off related to the surplus notes and the reciprocal. I'm guessing, and please tell me if I'm wrong, that you're essentially writing down the surplus note that was issued to the reciprocal and I would guess that's because it's not expected to be recoverable. The major question is, assuming I'm right, does this mean that prior management's thinking about moving everything into the reciprocal is not the current strategy? What's your thought on that?
Hey Paul, this is Steve. Thanks for the question. I'll start and then hand it over to Brad for technical details. I've been here since the beginning of June. My focus has been on getting my arms around the team, organization, and restoring profitability. The reciprocal is definitely on the agenda to explore, study, and decide upon, but I've only been here 60 days. We'll focus on that in addition to several other items through the remainder of the year. Give me a little more time to evaluate the business and that particular issue and we'll communicate any decisions around the reciprocal at the appropriate time. Brad will cover the technical aspects.
Yes, thanks, Steven, and good morning, Paul. Similar to the goodwill impairment, when you think about the reciprocal exchange, Kemper purchased $36 million of surplus notes from the exchange. We look at the performance of that exchange, which has not been making money, and when we forecast out over the next three to five years, the exchange could no longer support the valuation of those surplus notes. As a result, we wrote them down. We took a $21.1 million, or $21 million pre-tax charge. There's roughly $15 million of surplus notes left. We'll evaluate those as we go forward based on the cash flows of that legal entity. As Steve mentioned, we'll provide additional details around the reciprocal strategy and the exchange in the near future.
Maybe a little bit of a follow-up to Greg's question. If you're looking at California and the needed rate increases, is there a way to think about linking the rate increases you're working through in stages to get to profitability with the PIF growth? Should we expect PIF growth to be under pressure until technical rate gets to its ultimate level, which I assume you're not seeing yet? Is this a multi-stage process where eventual further rate increases get you there, or do you think PIF will not necessarily track the rate actions?
Hey Paul, thanks. There's a lot to unpack, so we'll do our best. Starting with diagnosis: we need double-digit rate in California to restore profitability. We're not profitable there, and other competitors have similar challenges. We've taken one rate change and have another filing pending; retention appears to be holding. We feel good about the impact of the rate changes we have in place. We are also taking non-rate actions and have slowed new business where calendar year impacts would be adverse. New business generates economic value, but in the near term on a calendar year basis it can adversely impact the combined ratio, so we are moderating it. We are also pursuing expense actions. From my perspective, PIF growth, both in aggregate and in California, is conditional on achieving profitability or a clear line of sight to profitability. We're not there yet, though we're making progress and are confident in our actions and levers. Once we see clear signs of profitability, we will thoughtfully and meaningfully grow PIF, but it must be profitable growth. Brad, anything to add?
I'll add a few comments. We saw some nice improvement quarter-over-quarter, particularly in California. The rate actions we took late in 2025 were effective in the second quarter—one in April and one in June. As Steve mentioned, we filed for another 6.9%. The non-rate actions constraining PIF growth are helping improve the loss ratio and the combined ratio. I expect those will continue to help margins. Expenses are also significantly helping. When you think about Steve's comments, we're doing everything we can to get rate and improve margins, but that will also be dependent upon frequency and severity trends in the marketplace. One encouraging point: typically from first quarter to second quarter there's seasonality and our combined ratio typically goes up. This quarter, it went down a little bit in California, which is a positive sign and gives me confidence that the non-rate actions are having the intended effect.
That's great. Maybe a follow-up: I got some wonderful positive feedback on your new hires.
Thank you for that.
Next question comes from the line of Andrew Kligerman. Andrew, your line is open.
Can you hear me?
Yes. Sorry. We can hear you now.
Great. I want to follow up on the question Paul was asking. If I understand California correctly, you got 6.9% effective, you filed for another 6.9%, but you indicated you need double-digit rate and you've taken some non-rate actions already. One, do you get that double-digit rate? Can you share the competitive landscape in California right now—what are competitors doing? Ultimately, when do you think you'll get to a point where you could turn around PIF? Kemper had well over 2 million PIF prior to COVID and now you're at about 928,000 personal auto policies. What will it take to pivot back to growth, and what's the competitive environment allowing for that pivot?
Thanks, Andrew. As I said earlier, we need somewhere in the double-digit range to restore profitability. We have a 6.9% filing pending. We filed in accordance with CDI regulation and have an effective date later this year. The data supports the change; while I can't guarantee CDI approval, we feel confident we can support it. We're not alone—competitor filings show substantial rate increases, particularly on the liability side. Leading into the double-digit need are the pending filing and our expense initiatives. As I've said, I've been here 60 days and it would be irresponsible to give an exact date for when we'll start growing PIF. We want to see a clear sign of profitability or a clear line of sight toward profitability. Once we get filings approved and continue progress on expense initiatives, we'll discuss how and when to grow PIF in California. We expect to be able to grow PIF, but it must be profitable growth.
I'll add that we saw modest improvement quarter-over-quarter, particularly in California. The rate actions we took late in 2025 were effective in the second quarter. As Steve mentioned, we filed another 6.9%. The non-rate actions constraining PIF growth are helping improve the loss ratio and combined ratio, and expenses are also helping. Those actions will continue to improve margins, but frequency and severity trends in the marketplace will also affect outcomes. Overall, we view the signs as positive so far.
That was very helpful. Maybe shifting over to commercial auto, I'm a little perplexed because you had an underlying combined ratio of 93.7%, but you mentioned you'll file for more rate to fix the book. If the underlying is okay, why would you need more rate? Also, this will be the fifth consecutive quarter of adverse development in commercial auto. Why do you think you might or might not have your arms around reserving in commercial auto after this last adverse development?
Thanks, Andrew. Let me explain how we're thinking about commercial auto. I see strong PIF growth, high single digits, and a strong underlying combined ratio in the low 90s, but we have successive quarters of prior year development. That gives us options. One option is to continue on the current path, growing at the current rate and taking rate at the current level, which is reasonable given the underlying numbers. Given the prior year development, however, we are taking more rate and tightening underwriting. The consequence will likely be slower PIF growth. We'll still have positive PIF growth, but a more measured approach helps manage commercial auto given the overall performance backdrop. Brad will comment on reserves.
Andrew, you're correct that we've had successive quarters of adverse prior development. Our total reserves for commercial are roughly $1 billion; about 90% of those reserves are related to bodily injury coverage. Bodily injury has been challenging to reserve correctly. Approximately 45% of our commercial book is in California, which is highly litigious, and we're seeing increased costs to defend those claims. Because of that environment, we have needed to increase our reserves. We think we have a handle on the issue, but the recent reserve strengthening over the last couple of quarters reflects that work. We are seeing some favorable development in other coverages, but bodily injury, particularly in California, remains the predominant issue and we'll continue to monitor and address it as needed.
There are no further questions at this time. I will now turn the call back to Michael Marinaccio for closing remarks.
Once again, I want to thank you all for joining us today. We appreciate your questions and continued support, and we look forward to talking to you again next quarter. Have a great day.
Thank you for attending today's call. You may now disconnect.