Kemper Corporation 2026 Q2 Earnings Call

Thank you. Good morning, everyone, and welcome to Kemper's discussion of our second quarter 2026 results. This morning, you'll hear from Steve McInerney, Kemper's President and CEO, and Brad 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 Flynn, Kemper's Executive Vice President and President of Kemper Life, and John Bisceglie, 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 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. 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're going to 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 clear accountability and more consistent execution.

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, and 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, and 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. 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.

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'm grateful for their commitment, and I'm looking forward to working with them in building a stronger Kemper. Thank you. With that, I'll 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'll 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 our 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 a normalized underlying combined ratio improving 0.8 points from 102.8% to 102%. 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, 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. 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.