Good afternoon, everybody, thank you for joining us here for the Personal Lines Insurance Symposium here with UBS. I'm Brian Meredith. I am the Insurance Analyst, it is my great pleasure to have our next fireside chat here with Kemper. We've got Joe Lacher, who's the President and CEO, Jim McKinney, who's the Chief Financial Officer, to talk about all the stuff going on at Kemper in the personal auto insurance market. We've learned a lot of stuff today, I'm sure we've got a lot more to learn here. Joe and Jim, let's start off this way. You guys had 11-point sequential improvement in your specialty auto underlying loss ratios in the first quarter. Massive amount. Maybe you can talk a little bit about how you got there. What was that 11-point improvement? How much of that's rate, non-rate? Can we still expect these sequential improvements to come here going forward? It clearly surprised people because your stock was up massively, which I'm glad because I'm recommending it. Maybe we can talk about that a little bit. Sure. Brian, this is Joe, I'll start, we'll do, I'm sure, a little bit of tag team here. Look, this was not entirely unexpected for us. I tell you that that 11 points in personal auto was a couple of things combined. I'll take the sort of one-time items and separate them from the ongoing. There was a little bit of pressure in the fourth quarter last year from what might've been intra-year expansion. Might've been some higher numbers in the first or second or third quarter that drove a piece of it. There's some seasonality. The fourth quarter tends to be the worst quarter, you would've naturally expected there to be some improvement when you adjust for those. The biggest single bucket was the result of profit improvement actions, both rate and non-rate activity that we've been pushing through the book. You can do a little bit of math. I think our disclosures, I'm going to get the page wrong a little bit, it's 10 or 11 or 12 in our earnings presentation. There's a page for specialty auto and a page for preferred, it shows the filed rate, the approved rate, and the earned rate in each of those books. You could combine those quarters together and get a sense of what the earned impact was on rate. The balance of it's going to be non-rate activity. It was some real robust improvement from the activities we've talked about from the last couple of quarters. We saw the issues last year. We started stepping on the gas on profit improvement activities. We acknowledged they were going to take a little bit of time to earn in. Once they did, they would continue. Just maybe putting some additional kind of metrics or color around that, Brian. A little bit of the way to think about that is seasonality, we talked about in our fourth quarter call, was three to four points, and we talked a little bit about that, I think, again, on the first quarter. That intra-year that Joe's referencing, think about that similarly in that three to four points. Had a four-point improvement driven by non-rate actions and the other elements that we're doing from a frequency benefit. You see a little bit of the rate coupled with another sequential trend of about three points coming through, and that remaining component was basically the further non-rate actions offsetting the continued trend that came through in the quarter. The sequential trend, year-over-year, about a 15-point severity trend, again, that we referenced on the quarter. How to potentially move that or map that forward? Couple of the highlights that I made on the call, because I know that it's complex, and this is something we don't normally try to provide this level of detail because there are moving pieces, I just highlight that around. In this environment, I think it's important. Big picture-wise, think about non-rate actions largely putting us in a position to offset the continued elevated trend in the sequential severity pressure that it has continued to build and will continue to build, albeit at a more moderate rate than some of the things that we were seeing in that third or fourth quarter last year. The comments I made on the call were very much, okay, you could then think about earned rate as being a potential proxy for the continued sequential quarter-over-quarter improvement that you might see in second and third quarter, with probably more of a flat result from where I see on that standpoint in the fourth quarter because the continued sequential improvement that we'll have will largely effectively, you have seasonality or that is likely to offset that. I've tried to provide a little bit of a window. You guys will know, and others will, whether we'll do a little better or a little worse than that. The items that would drive it worse is a materially different or higher severity trend than what we've seen so far. I only highlight that. It's not that I'm expecting it, but it's a dynamic environment. We continue to have that mindset. We've had our reserving positions and our pricing positions correspond with a really challenging environment, and we're operating that way. If things play out a little bit better, that's great. Just like everyone else, we don't have a crystal ball that the environment's dynamic. It fundamentally changes in some way. We can't guarantee that outcome, but we feel pretty good with where we're at right now, and we feel like that we're on the path back to our profitability. Yeah. What are you baking in from a severity perspective? What are you assuming kind of going forward? Right. Or what you're pricing for, right? Because, like today, we saw used car prices are up a smidge, right? Just a little bit, sequentially from April to the midpoint on the Manheim Index. Yep. I get there are going to be volatility here and there on this stuff, are you assuming stable used car prices here going forward? Also maybe a little bit on what are the key components, key things we should be looking for. No, what we've highlighted, we continue to highlight high single-digit, low double-digit trend expectations across the business here for an extended period of time. You're going to see some differences on how a first quarter looks like it's a 15-point year-over-year severity trend. If I take it back to kind of the 4Q, it's more like a 3, 4-point severity trend on a sequential basis. We expect some ebbs and flows, I would think about it, when we're looking at it for the full year, and again, we think there'll be some ups and downs. We don't think it'll be constant improvement or constant step back. What we've got that view, I would think high single-digits, low double-digits is essentially what we're working around at this stage. We're also repeating our statement that we're not looking at the Manheim Used Car Index and pricing to that. We're looking at total loss trend, which is the combination of frequency and all the components that go into severity. Used car prices have changed a lot, which is one piece of it. We will expect at some point those will back off or won't increase forever. We're also expecting labor rates may go up or cost of other parts. Yeah or bodily injury. There's a bunch of things that go into severity. If you only pick that one item, you're going to be way too sensitive on that, and you're going to miss the total. We're looking at the total in our pricing thought process. That doesn't mean we don't analyze those components, but when we're thinking out nine, 12, 15 months, we're thinking about the total. The total. Right. In that total, when you're thinking about the total, just, I mean, frequency for you, for y'all, as you said, is already above 2019 pre-pandemic levels, right? Are you considering- No. We said the opposite. We said absolutely opposite. Oh, it's still below. It's below. Frequency is about 6% below where it was on a mix-adjusted basis relative to 2019. Okay. It's 5% overall relative to the P&C. It's a total P&C book if you were asking for that view. We feel pretty good about, again, we continue to make enhancements on the underwriting side and feel good about that despite miles driven being up. Good. Okay, excellent. Then I guess another thing I get a lot of questions about is, and you kind of talked about it, but kind of rate versus non-rate. The non-rate actions that, Joe, you've talked a lot about. Maybe fill us in a little bit about what those actions are and how much of that's still to come through. Do you ease up on non-rate actions here as we get through 2022 and pricing becomes kind of more adequate? Let's go through what a couple of the actions are and then maybe a reminder of where and how we use them. Think of yourself driving a stick shift, if you can ever, do not remember it. Somebody told you when you first learned, you could slow the car down with the brakes, you could slow it down by engine braking, you could slow it down by taking your foot off the gas, or you could actually slow it down using the emergency brake. There's a bunch of ways to do it. You don't want to drive with the emergency brake all the time. Maybe engine braking isn't the best way all the time to do it, but those are all effective. In an ideal world, we'd probably be using a normal rate process to work these things. In a geography where we were having problems getting rate, the non-rate action becomes more important. We're using these tools differently by geography. A non-rate action might include an underwriting change. Some of those underwriting changes might be that we stop writing certain kinds of risks. Some of them we actually have in our pricing programs. We might have multiple pricing tiers. If we adjust the eligibility and you're no longer eligible for the most favorable pricing, you're now moving to an unfavorable or less favorable pricing. That effectively functions like a rate increase, but it's an underwriting eligibility change. The rate card didn't move. You just didn't get preferred pricing, you got less preferred. I don't want to say preferred or not in that rate tier. We could lower commission levels. Okay? That's not a non-rate activity, but that basically, if you lower commissions three points, that's a three-point improvement into profitability. We can change billing plan options. In some cases, we've got customers that are very cash flow sensitive. If you no longer allow them to pay monthly, you require 100% down payment. That cash flow dynamic might cause a customer to say, "You know what? I'm going to go somewhere else." That even if the absolute rate is higher, the monthly check or the payment is lower, and I can manage my cash flow better. That will cause an underwriting change in the book. We might take certain customers where we were offering full coverage, and now we offer liability only. The biggest inflation problems that are running through the book right now are in metal-related coverages. If we eliminate Comprehensive and Collision, we eliminate all first-party medical coverages, and we're only left with third-party medical coverages and bodily injury. That is a non-rate action that changes the mix of the book. That probably wouldn't be tolerable in a preferred company because you're not going to find a lot of preferred customers who want liability only, but in a specialty auto case, they might be okay with liability only and not having the first-party coverages. Some of those activities we might do in all geographies, some we might say if State X has been very receptive to rate activity and we've been able to take a lot of rate increases, we don't need those. In a state that might be saying, "Hey, we're not allowing rate to move in," then our only choice is to use these non-rate actions. We might be more aggressive in that environment. We're using them differently by geography based upon what tools are available in that locale and what challenges we're dealing with. We describe them generally, they're utilized very precisely. Got you. I assume that as rate becomes more adequate, you get priced through, you lay off some of those Right non-rate actions open it up a little bit to get growth going again. Correct. Help it, I guess. If the entire rate card moves up, you might open up the more preferred pricing in that rate card, and it opens up. I think Jim's used an analogy, to some degree, if you can think that we had a funnel of a certain width before or a pipe that let things in, it might be five inches wide. We've tightened it in some states to two inches wide, in other states to one inch wide. If the rate card moves up, we can actually go back to two or four or five and adjust accordingly. Depending on the geography and depending on its rate adequacy, we've adjusted that to what comes through. Good. Makes sense. One of your competitors talked about the number of states that are "rate adequate" for them right now, or they're getting there close. Do you have a similar perspective? Can you give a similar perspective for Kemper and how much your book do you think is getting close to that price adequacy, rate adequacy? Yeah. I think, first, we got to split it between business. I'm assuming you're asking largely a KA component given- Specialty auto Specialty Auto, because that's the largest- Yeah, Specialty Auto. Sorry, I should clarify that. Specialty Auto, yeah. In states outside of California, we're close or largely at price adequacy or rate adequacy on the cohorts coming in. To avoid confusion, that doesn't mean you're going to see our historical combined ratios yet. It's at a cohort level. You have a certain amount of pricing, a certain amount of new business costs. It will take time for that to season in to hit our historical level of profitability, where you have the same vintages going out or that are renewing, and essentially, at that lower combined ratio offsetting your new coming in that usually has a higher combined ratio in that first year, but makes sense overall. That mix still has to normalize, and that will take a little bit of time for that to happen. We're largely rate adequate, we still have to continue to file rate and do those activities, and that can change, because you still have elevated severity trend, right? This still remains a dynamic. When you're hearing us and others, we're not telling you that we're done taking rate at this stage because the severity trend's continuing. We're also telling you we're a little more cautious right now than fully open and appropriately and very thoughtfully going to these markets because there's more surprises, and the surprises tend to be larger. That can be both positive and negative at this point in time. Anytime you have that kind of environment, you got to go a little bit slower in terms of how you approach it than you might otherwise normally would, simply because of the risk environment and the unintended outcomes that certain things could have. Got you. I guess what you're saying is you're going to be a little more cautious. It's not time necessarily in those states that are rate adequate to start stepping on the growth. Correct. Think of it as a risk-adjusted view. In an environment where there's 2% inflation and it's very stable, you get a high degree of confidence that it's a stable environment, you know where you are. Yeah. In an environment that's less stable, you put a little risk adjustment around that and say, "You know what? I need a little bit of margin for error." Where we are, the likelihood of it getting a little worse is a little higher than it getting a little better, so we want a little more margin of safety around it. Got you. Makes sense. I guess another thing that I think just curious about is your preferred auto business. How long do you think that takes to get back to underwriting profitability? I know you were doing a lot of work on it even prior to what was going on. Maybe some perspective on what's going on with your preferred auto book. Yeah. It also had an 11-point sequential quarter improvement. Yeah. It's coincidental, it was exactly the same, but a lot of improvement there. Its biggest challenge right now is in the state of N.Y., which has some similarity to California in terms of rate processes and unique rules. It has more 12-month policies as a preferred book. It's just going to take a little longer to work its way through, and it's got a little bigger problem. We're not nearly at the point where we would describe our specialty auto business that we've got rate adequacy in most states, or near rate adequacy other than California. It's going to be another cycle out. For the preferred auto book. I got you. Yeah. Just curious, Joe, a lot of times when we talk about your specialty auto book, you say, "Listen, there's a part of our specialty auto book that's preferred." It's a better standard risk, right? How do I think about the difference between your preferred segment and your specialty segment, right? I think some people have, and I have also thought of your specialty as purely non-standard, but that's not the case. Yeah. Let me try to help you with the words on it. Our preferred auto business is really typical of what you'd think as a definition inside of preferred, in any other spot. Our specialty auto has some parameters in it that are different. Some of it is true core, what people would call non-standard. Others is there's a different reason it requires the company to have a specialty. It might be a more urban geography. It might be difficult regulatory or fraud and abuse environments like Miami and Fort Lauderdale. It might be Hispanic customers where Spanish is their first language, and what they're looking for is a different level of service, and somebody who speaks their language and manages it that way. None of those have the risk profile that would be a stereotypical preferred view. They're not in what I would call sort of the preferred underwriting risk. When you separate them inside of the specialty auto environment, some of them are high-risk drivers and some of them are less high-risk drivers. What's happening is we're trying to find the right adjective to people understand it. If you think about the bucket shop, high risk non-standard, there's a chunk of these risks that are more preferred than that or more standard than that. That doesn't mean they're looking exactly like the preferred profile, but they're not behaving in a way a traditional bucket shop set of non-standard would. They'll have better retentions, they'll have better loss performance. They'll have things compared to non-standard that are improved, but they're not sort of fully into that preferred bucket. There's some granularity underneath it inside of the specialty auto, again, that's why we think it's a specialty, and we call it that, not non-standard auto because it has multiple. Got you flavors inside of it. Got you. In that preferred book, is that a kind of a long-term strategic kind of business for you all to be in? That continues to be one that we've described as challenged, Brian. We're working hard to get into a better set of profitability. We'd had a point of view early, in this team's perspective, that we might be able to get a real effective monoline homeowner strategy, and we've talked about that in the last couple of years, but we don't think that'll work. Yeah effectively. It's got to be a more main street package product niche for it to work. We got to get it to profitability and get it to scale. Otherwise, it's going to be better served being part of somebody else's organization. We're working through it right now. Given this particular environment, it's a little more challenged than it had been, and it remains strategically challenged for us. Makes sense. Just one thing for the audience, if you're on the Open Exchange, you can ask questions also just jot them in on the lower right-hand side of your keypad or your screen. You can type in a question, and I'll see it, and I'm happy to ask it. Let's pivot back to California. Obviously, it's something that's very topical when investors call and ask about Kemper. Maybe talk a little bit about kind of where we are right now with California and the process. Any insights into what the elections are going to look like in your view and what the potential outcomes mean for you guys? Sure. There's a couple of pieces to it. The state has its own unique rules on how you do rate filings and how that process works. They've got a rate template that you have to fill out, which to some degree is a little bit of fill in the blanks. They go through a review process. There's an ability for an intervener to jump in if you ask for rate largely over 7%. That slows processes and makes them different than other geographies. We filed for rate in all four of our California pricing programs. I believe our first couple in were the first two accepted by the department, and moved on to rating analysts, at least as we can see through their website. All four are in the department now and in their queue, and they're working through it. That normally takes them four to five months to work their way through them. My sense is they're operating a little slower than usual. Their insurance commissioner is an elected position. The primary, I believe, is the first week of June. The general election is in November. The primary gets you down to two, and then those two move on to the general election. My understanding is the current commissioner is polling ahead right now in the primary polls. I haven't seen the latest update. Don't know the exact numbers, but last I checked, there was a significant lead there. That makes it a bit of a politically charged environment. The commissioner has expressed a clear point of view that he believes that the industry as a group did not provide enough rebates to customers for the early stage of the pandemic, that when people weren't driving. I know we've expressed to the insurance department that they've got a set of rules that look sort of at a rolling eight quarters when they do rate filings. If you pick a rolling eight quarters, there were more than enough credits. The commissioner has a strong point of view about some need there, and we'll see sort of how that works its way through. I think that, to some degree, is a one-time issue that he's focused on, and we're all collectively focused on rate, which lasts for a long time into the future. We're actively working with the department to navigate through those issues. Got you. I guess, as you think about it, what happens, the scenario that you get through the primaries and the commissioner is like, "Well, wait a second. I want to wait till we get through the actual elections before I'm going to grant any rate increases," because it's a political issue. What do you do in that situation, right? Maybe also answer the question here that I often wonder about. Isn't the insurance commissioner's job also to make sure there's an ample auto insurance market in the state, right? At some point here, not just you, I imagine there's other carriers that are going to get pretty frustrated. Let me give you maybe two or three thoughts on it, and I'll do them in reverse. I think every insurance commissioner recognizes their primary job is to have a vibrant market and have solvent carriers. What we do as an insurance company is we promise and we take money from you on the front end and promise to pay a claim in the future. They've got to make sure we've got enough money to pay those claims in the future. Otherwise, we're not able to deliver on the promise. They have a secondary obligation to make sure the rates are both adequate and not usurious. That has a little more political zip to it, but the primary is to make sure we're there and we're solvent to deliver on our promises, and that a market's available. I think you're clearly seeing the California insurance market tighten, every measurement we have says there's just fewer companies offering products on any given quote. The shelves in the store are starting to become more and more bare, which will become an increasing issue. If you're in a grocery store and you're selling bread, as long as there's one brand of bread on the counter, there's still bread. When there's none, you got a problem. This will become an increasing issue, but I can't factor in personally how the department's working through that calculus. I'll give you another thought, Brian, when you think about us, because this is a sense that I think that people are trying to get through on our numbers. Almost everybody in the industry will talk to you about a new business penalty. It's not technically a new business penalty, but it's a little bit of a comment Jim was making before when we talk about rate adequacy on a cohort or a vintage. We know that if you put on a set of customers in the first half of 2022, we know some of them will renew in 2022, and they'll renew in 2023, and some will be here in 2024 and 2025. Typically, the ones that are gone in the shortest period of time make less money, and the ones that are longer have a better long-term profitability. That's effectively that new business penalty. In some ways, we all as an industry tolerate putting on risks where maybe in the first policy period, it performs less adequately because over its lifetime, there's a totality of that book and cohort that's a winner. Okay, if you think back to our disclosures over the last several years, those same pages I referenced before with our specialty auto and our personal insurance. If you look at that specialty auto in the top right corner, what we showed you for a number of years was our growth in California, our growth in Texas and Florida, and our growth in other states. Yeah. There was much higher growth in Florida and Texas and other geographies. You should generally assume that there was a much higher new business penalty in those states. It might have been just as rate adequate to us over the length of time in the cohort, but in a given period, those states were likely running a higher combined ratio because of, you might argue, that short-term growth penalty. Okay? Is that making sense? Yeah. Absolutely. Yeah. One of the non-rate activities I didn't describe that I should have is reducing the new business penalty. If you actually slow down new business, what you get is the other cohorts just age and naturally improve, and you're not adding the new in the challenge. One of the things you would have logically assumed if you did that math is if you assume that all the states had exactly the same rate adequacy, you would assume in a given calendar year that Florida and California might have been performing worse. I'm sorry, Florida and Texas would have been performing worse than California because more new business. The other geographies would have been performing a little worse. The need to get to rate adequacy, California didn't have to move as far. As you dial the new business down and slow the growth, as you get the rate in the other states, there was actually more improvement in some ways needed in the other geographies. As we dialed new business back in California and worked the non-rate activity, we're making an impact there in a different proportion than you might expect in other spots. If you did that analysis a little bit and diagnosed that new business penalty, it's not as if every state had the same combined ratio we reported in the fourth quarter because of those differences Right in new business. Got you. That makes sense. For California, I know you're limited to the amount of rate you can take when you ultimately get rate without having to go through the longer process. Is it going to take more than one cut at it, do you think, to get there? It's likely to take more than one cut. I think that would be when you just think about the California process, kind of the rate approval, 6.5%, is usually the right place where you probably. There's more inflation in that has come through the environment. Unless you start having negative trend or that, I would expect it'll take a couple of times through the loop before we get to kind of the target profitability. I want to point us back because I don't want us to get too lost in the California component versus the others. What I'm referencing and the numbers I'm referencing, they're not going to materially change one way or another, at least here with California. If California moves sooner than later, that's great. It'll allow us to open up the funnels a little wider, but we'll fundamentally get to the same outcome. It would be nice to see 1%, 2%, very small amounts of pip higher, not really materially here. That might be kind of the change that you see as we go through this. I wouldn't suggest that the numbers I'm referencing as a base case, with what I know about the environment today, have changed at all or would change relative to California moving. That said, sooner is better, and I think it's better for Californians, I think it's better for us, I think it's better for a lot of people. These are a lot of folks. Like we're generally the low rate or certainly one of the low-rate options in the market. To the extent that we're not able to provide access, that means that people are having to go to much higher priced options, and sometimes that'll be lower quality as well. It's certainly not doing a service to Californians, quite frankly, to not have us to be able to provide the quality product at the same levels that we've historically provided, if not more. The book needs rate, it probably didn't start in as challenged a position as some of the other states did. By slamming the brakes on new business and moving the non-rate activity, we're probably holding serve on some of the loss trend, and making meaningful improvement in other geographies. It's not deteriorating and maybe making some modest improvement because of those actions. Again, to Joe's point. Got you not the best answer, I think long term for the broad market and for consumers, but it's not an increasing hemorrhaging item for us. Great. Makes sense. Let's shift here, actually. Maybe we'll kind of, got a couple minutes left here, talk about long-term growth prospects for Kemper. Something unfortunately, we haven't talked about for the last 18 months. Which prior to all this thing, it was a great growth engine, kind of consolidating up this specialty auto area. Maybe, Joe, you can give us a little bit of a perspective on what your kind of TAM looks like in your marketplace and what are the opportunities here, particularly as we come out of these profit issues. Yeah. Look, Brian, we've got a high degree of confidence in our business model. The specialties we've got, particularly on our specialty auto business and our core life insurance business, are strong. We saw the issues and have moved to impact profitability. We've got a risk-adjusted view, as we said a moment ago, right now, that we're sort of not stepping on the gas at this moment. What we've talked about for the last couple of quarters is the faster you spot the issues, the faster you work through the profitability issues, the faster you're able to open your funnel. There are examples of folks out there who two quarters ago said there's not a problem, and this is okay, it's somebody else, but we're not getting it. You find that they may have shown a point of sequential quarter improvement. As Jim talked about, there ought to be three or four points just from seasonality. If you only had a point of sequential quarter improvement, that means you lost ground. You didn't apply the penicillin you needed to, and you're going to have to be taking knee-jerk reactions for a while. We're expecting in a reasonable period of time, not 60 days, not 30 days, but to be in a better position than the bulk of the competition, and can see ourselves moving back towards a growth perspective. I don't know exactly how many quarters that is because I got to see what the inflationary environment is. We do fully expect that we'll be through that funnel or through that tunnel faster than most, and be on the other end to capitalize on the strengths that we've got. What I would add. Got you. To Joe's comments there. We also have a couple of different businesses, and those areas where we have rate adequacy and price efficiency, whether that be in life or essentially commercial auto, which is a great story. In those areas, we still have very sound market leading type growth. If not top 5, top 10% type growth, if we're not the absolute leader in those sectors where we're earning strong returns on our capital, we're doing really good things for consumers in that space and further building on the totality of our competitive advantages across the place. While you may not see the capital deployed in particular this area, it is moving to other areas that are going to further diversify us and are going to be a nice tailwind and continue to produce strong profitability for the totality of the organization into the coming future. At some point here, we're going to be back to kind of our rate adequacy. We're going to be able to widen the funnels. Not only will we have the advantages that we had before, we've continued to invest in this environment to improve on, to further advance our competitive positions. We have been very focused on home improvement projects, and you're going to see, and we're all going to see the benefits of that when we come out of this. We're going to be stronger than where we were before we entered this environment. We are taking advantage of it. Again, we don't know the exact timing, but we do feel pretty good about where we'll exit and that when we exit, we're going to be able to achieve kind of more of those historic growth levels that you've seen for the business. That's terrific. That's a great spot, I think, to conclude it there because really appreciate y'all's time. This was really helpful, and really appreciate it, and we'll be speaking soon. Thank you. Terrific. Thanks, Brian.