Diana Hickert-Hill - VP, IR Don Southwell - Chairman, President & CEO Denise Lynch - Property & Casualty Group Executive Frank Sodaro - SVP & CFO John Boschelli - SVP & Chief Investment Officer

Christopher Martin - Macquarie Steven Schwartz - Raymond James Paul Newsome - Sandler O'Neill Christine Worley - JMP Securities Adam Klauber - William Blair

Welcome to Kemper's Third Quarter 2015 Earnings Conference Call. My name is Jonathon and I will be your coordinator today. [Operator Instructions]. I would now like to introduce your host for today's conference Ms. Diana Hickert-Hill, Vice President, Investor Relations and Corporate Identity. Ms. Hickert-Hill, you may begin. Diana Hickert-Hill: Thank you, operator. Good morning everyone and thank you for joining us. This morning you will hear from three of our business executives starting with Don Southwell, Kemper's Chairman, President and Chief Executive Officer; followed by Denise Lynch, the Kemper's Property & Casualty Group Executive and Frank Sodaro, Kemper's Senior Vice President and Chief Financial Officer. We will make a few opening remarks to provide context around our third quarter results. We will then open up the call for a question-and-answer session. During this interactive portion of the call, our presenters will be joined by John Boschelli, Kemper's Senior Vice President and Chief Investment Officer. After the markets closed yesterday, we issued our press release and financial supplement. In addition, we filed our Form 10-Q with the SEC. You can find these documents on the Investor section of our website, kemper.com. Please note that our discussion today may contain forward-looking statements. Our actual results may differ materially from these statements. For information on potential risks associated with relying on forward-looking statements, please refer to our 2014 Form 10-K filed in February as well as our third quarter 2015 Form 10-Q and earnings release. This morning's discussion includes non-GAAP financial measures that we believe may be meaningful to investors and our supplement and earnings release, we have defined and reconciled non-GAAP financial pressures to GAAP where required in accordance with SEC rules. And finally, all comparative references will be to the second quarter of 2014 unless we state otherwise. Now I will turn the call over to Don.

Thank you, Diana. Good morning, everyone and thank you for joining us today. Overall we had a solid third quarter and I'm pleased with the progress we're making. Key property casualty legacy trends are improving and we are getting nice growth from the Alliance United acquisition. While we know we have work to do it is nice to see improvement in key areas. This morning we will begin our review by discussing our life and health segment results and investment portfolio performance. Denise will update you on the property and casualty segment, and Frank will update on the financials, capital and liquidity, then I'll wrap up. In total Kemper earned $38 million of net income. Total revenues were $615 million, up $76 million as we added volume from the recent Alliance United acquisition. In our life and health segment, we had another solid quarter with stable trends. We earned $24 million, about a $3 million improvement primarily driven by higher investment earnings. Revenues were $206 million with, up $4 million with a $6 million increase in net investment income. Kemper Home Service Companies continue to benefit from our field office consolidation efforts. Production on a per agent basis is up about 10%. Not only does this increase agent pay, but it also helps agent retention and recruiting, and in year to date we took out about a point of expense in our field structure. In Reserve National, we are encouraged to see premiums stabilize. Our agents are thriving despite the marketplace changes that affected our hospitalization product. We learned how to live with the Affordable Care Act and our agents can still make a nice living. I will turn now to investments. Net investment income increased $4 million in the quarter to $76 million, benefiting from the continued good performance of our alternative investment this fixed income portfolios. Our pretax equivalent yield is holding up well at 5.2%, up 17 basis points for the quarter and eight basis points for the year. We are taking reasonable risks to generate this strong performance. Interest rates are neutral for the year while credit spreads have expanded. This allows us to continue to put money to work at slightly higher yields than we originally planned for in our investment grade portfolio. We also generated $5 million of pretax net realized gains primarily from sales of fixed income and equity securities. For the quarter, our total return of a positive 1.2% primarily from net investment income. We are very pleased with our alternative investments' positive total return both for the quarter and year to date in light of the S&P 500 and high yield negative performance. Now I will turn the call over to Denise to discuss our property and casualty segment results.

Thank you, Don. I will start with the segment overview in total and then go through the performance of each of our lines of business. The property and casualty segment earned $21 million in the third quarter up from a loss of $14 million a year ago. I'll note that we had a $35 million after tax software write off last year. Our total property and casualty revenues were $405 million, up $76 million. This increase was driven by our recent acquisition of Alliance United which more than offset a decline in our legacy lines. The Alliance United brokers are very engaged and are delivering solid growth. We continue to work through the integration and are optimizing processes and performance. We are positive about this acquisition as it brings us scale and markets where we target growth. Our total policies in force increased to 1.19 million in the third quarter up from 1.17 million in the second quarter and 850,000 last year benefiting from our acquisition. Additionally we saw continued improvement in our legacy book with Q3 marking our lowest level of decline in policies in force in 12 quarters, fueled by the healthiest level of new business policies written since Q2 2013. While policy retention continued to improve with our preferred product lines, our actions to address increasing loss trends on the legacy nonstandard auto book negatively impacted policy retention. This quarter was uneventful on the catastrophe front and our preferred auto product line continued to make progress with improving revenue and profit. Conversely this was the second quarter of deteriorating loss result on the nonstandard personal auto line. The expense ratio was 24.4% with the inclusion of Alliance United. The legacy expense ratio rose about 0.5% with expenses down $5 million excluding the 2014 software write off. Now I'll provide an update on each of our lines of business. I'll start with preferred auto. Net written premium was $113 million, down about $10 million. And net earned premium was $112 million, down $18 million. New business premium grew by 39%, as new policies in force increased for the fifth consecutive quarter to the highest level since the third quarter of 2013. Premium retention at 83% improved both quarter over quarter and sequentially. The underlying loss and LAE ratio improved to 68.5% making this the 11th quarter over quarter improvement of underlying loss and LAE in this line. While we continue to have favorable reserve development it was at a lower level than what we experienced last year. Pure premium declined six percentage points primarily from improved frequency. The longer term trend remains flat with rising severity and liability and collision coverages offset by declining frequency in all coverages. Average earned premium was up just under 1% after filed rate increases of 4% were offset by mixed changes. Moving on our nonstandard personal auto line -- net written premium was $189 million and increase of $111 million. Net earned premium was $177 million, an increase of $101 million. While Alliance United drove the majority of the increase, the legacy nonstandard auto net written premium was up 2.2%. Legacy new business writings were up and marked the sixth straight quarter of period-over-period improvement. The underlying loss and LAE ratio increased 8.5 points to 85.6%. About half of the increase was driven by the Alliance United acquisition which performs at a higher loss and LAE ratio and a lower expense ratio. However, the legacy nonstandard auto book deteriorated four points. 2015 has marked a significant change in loss costs after a fairly benign pure premium trend over eight periods. While not rising as quickly as Q2 we observed a 5.7% rise in pure premium from adverse frequency from all lines in most geographies. Severity rose 1.6 points, mostly in property damage and comprehensive coverages. Average earned premium is up just over 2% with mix shift offset by fixed rate changes. We continue to believe environmental factors such as more miles driven and increased repair costs are contributing to this increase in pure premium. We accelerated the timing of rate filings, and increased our filed rate plan to 11% in our legacy book and have also filed rate in our Alliance United book. We also began rolling out a new class plan on our legacy portfolio, and are implementing various additional underwriting, claim and agency management actions to address the rising pure premium trend. In commercial auto, both net written premium and earned premium were stable at $14 million. After three consecutive quarters of improving period over period results, adverse bodily injury and collision pure premium drove the underlying loss and LAE ratio up 16 points to 97%. Large losses were double the prior your and above the multiyear average. Adverse development from prior quarters of 2015 and prior accident years was $2.2 million primarily in the liability and collision coverages. This compares to favorable reserve development of $600,000 last year, various agency management, underwriting and rate actions continue. It is important to remember that this is a relatively small book and subject to volatility. Now turning to the Homeowners line, net written premium was $75 million, down $3 million, while earned premium was $72 million, $6 million lower. New business production grew to the highest level in more than two years. Premium retention was just under 84%, up sequentially for the third straight quarter. We benefited from a quiet quarter on the weather front. Our catastrophe loss and LAE totaled $3 million after tax, a decrease of $5 million, and well below expectations for what is often an active catastrophe quarter. The underlying loss and LAE ratio 1.5 points increased to 54.4% primarily from increased severity from large losses. Average earned premium was flat as mix changes offset 4% file rate changes. So looking at the property casualty segment in total we believe we continue to make progress in core profitability and revenue with our preferred auto and home line. We are addressing adverse loss trends in the nonstandard auto and commercial vehicle lines with aggressive action. We continue to focus on managing our top line and are encouraged by agent engagement across the country, and we pleased with Alliance United and its shared services integration. Now I will turn the call over to Frank.

Thanks, Denise, and good morning, everyone. Today I will cover Kemper's consolidated third quarter performance, capital, and parent company liquidity. Kemper reported third quarter net income of $38 million or $0.73 cents per share compared to $5 million or $0.09 per share. Our net operating income was $37 million, or $0.70 cents per share for the quarter, compared to $2 million or $0.04 cents last year. Both net income and net operating income in 2014 included a software write off of $35 million after tax or $0.67 cents per share. Total revenues were $615 million for the quarter, an increase of $76 million or 14% as $100 million of earned premiums from the Alliance United acquisition was partially offset by lower earned premium by our legacy P&C lines. Investment income increased $4 million for the quarter. The annualized pretax equivalent book yields on average invested assets increased 5.2% in the quarter compared to 5.1% last year. The property and casualty segment reported net operating income 421 million for the quarter compared to a loss of $14 million last year. Excluding the software write off last year results were flat as $5 million of less favorable reserve development and a higher loss in LAE ratio were mostly offset by $6 million of lower catastrophes and the inclusion Alliance United results. Alliance United added about $2 million of net operating income to the P&C segment. In the third quarter, we finalized our purchase price allocation, and as a result the bottom line benefited from a one-time catch up adjustment of $2 million. As part of the acquisition we hold $12.5 million in escrow to secure general indemnification receivables. Unfavorable reserve development and legal items put us above escrow so approximately $2 million of losses flowed through to Kemper's bottom line in the quarter offsetting the purchase price adjustments. Net operating income for the life and health segment was $24 million for the quarter compared to $20 million last year. Results increased primarily from higher net investment income and lower expenses partially offset by higher policyholder benefits. Both benefits and expenses fluctuated within our expectations. Net operating loss from corporate and other increased $3 million, primarily from higher retirement benefits related to the impact of low interest rates on the pension liability. I will now cover book value, third company liquidity and capital. Book value per share was $39.45 at the end of the quarter down 1% from year-end, largely from the impact of higher market yields on our fixed maturity portfolio and shareholder dividends partially offset by net operating income. Book value per share, excluding unrealized gains on fixed maturities was $35.04 up 2% from the prior year end, primarily from net operating income and partially offset by shareholder dividends. From a liquidity perspective at the end of the quarter the parent company held cash and investments of $345 million and our $225 million revolver remained undrawn. Statutory surplus levels in our insurance companies remain strong, and we estimate that we will end the year with risk-based capital ratios of approximately 400% for our life and health group and 325% for our legacy P&C group. In October the life and health group paid an ordinary dividend of $50 million to the holding company and would be able to pay an additional $30 million during the remainder of 2015 without regulatory approval. We plan to make a $30 million contribution this quarter to Alliance United primarily to support Alliance United's growth and for the reduction in statutory capital resulting from adverse pre-acquisition reserve development and the non-admission of indemnification receivables. During the quarter we repurchased nearly half a million shares at an average price of $35.39 bringing our total repurchases for the year to $41 million. We estimate we have more than $225 million of excess capital. I will now turn the call back over to Don.

Thanks, Frank. I will now touch briefly on our three long-term capital allocation priorities. Funding profitable organic growth is our top capital priority. We are encouraged by the improving new business and retention trends in our legacy business and we expect Alliance United to continue to grow. Strategic acquisitions are our second priority and we are pleased to have Alliance United as part of our property and casualty segment. We continue to work through the integration process and look forward to the continued benefit of having it in our family of companies. On our third priority, we returned significant capital to shareholders through dividends and share repurchases. In total we returned $30 million to shareholders in the quarter. Now I'll turn it the call over to the operator to take your questions. Operator?

[Operator Instructions]. Our first question comes from the line of Christopher Martin from Macquarie. Your questions please.

My first question is related to the Alliance United Growth. Can you talk about just briefly fairly aggressive growth Alliance United has had over past few years? And also now seeing there is unfavorable development you will be putting more capital into that growth? Can you talk about where you see the book going as you take corrective actions?

I will talk about the revenue growth at Alliance and then turn it over to Frank for your second question. Alliance has positioned itself very well in the California market. It has a very focused plan on meeting the needs of the brokers it does business with and the policy holders it targets. It has been very strategic about ease of doing business strategy and the product positioning of its portfolio and it has really benefited from delivering that value to the brokers and continues to benefit from delivering that value to the brokers. We expect that to continue. As we look forward we also are looking at how we position the product and the business for continued profitability and growth. And so we look at all of the factors going into that whether it is pure premium or the type of risks we are insuring and we will continue to make good choices about profit management and growth.

Chris, if you want me to add to that -- for the contribution. So just put in perspective, the additional growth from what we were anticipating is about 25 million of premium. So that is adding -- we cut a pretty close so when we put the 75 million made the contribution in the first place. And the rest of it is really kind of a timing issue. We had adverse development that the indemnification was put in place with that in mind and the non-admission of the indemnification receivables kind of a timing issue at this point.

So then with the growth that you are expecting sort of the actions you are taking to improve profitability, do you expect to earn 200 million in premiums from the Alliance United deal this year?

Yes. We still expect to come in over 200 million of premium from that acquisition this year.

So next questions is, can you guys sort of talk about the lawsuit that was announced last week against the treasurer in the State of Illinois?

Sure I will take that one. First let me just emphasize that we comply with all Illinois law and regulations regarding both unclaimed property and payment of life insurance benefits. We believe it's improper for the treasurer to interfere retroactively with our very clear contract terms which haven't been approved by Illionois regulator and beyond that I would refer you to our 10Q for a more elaborate discussion.

And one last question that is really unrelated. You have had really good results in your alternative investment books which most people have not. Can you talk about what investments you have in there and what your performance has been like quarter to date?

Sure this is John. You know, the alternative investment book has really three main groups. One group we group it into our equity method and fair value method, book of business that really resides in our insurance company. That's kind of a long tail, long-term investment and really the underling investments are credit related. So we just been kind of plotting along kind of goldi locks environment so that’s the really the big driver in most of that result. We also have a fair value option component which is made up of our hedge fund book that’s held at the parent, and that is really targeted to be market neutral. So with that we do have a little insight into this quarter and it's about neutral or just slightly negative.

Thank you. Our next question comes from the line of Steven Schwartz from Raymond James. Your question please.

Just a few, First for Frank, the 225 million in excess capital that you cited, was that just the insurance companies or did that include the holding company as well?

That's total company.

Can you remind us vis-a-vis the insurance companies what you would measure excess capital against your 400 would be versus what target say for the life companies?

Steven, it is kind of a complicated way to get there. I would say the 400 is a little bit over what we would target and the 325 is just a little over. In our insurance companies we look that we are getting pretty close to the point they are where -- right where they need to be. So not a lot of excess sitting down in the insurance companies now, we have fairly aggressive taking that up to the parent.

And this is probably more important for life and health as well, but kind of what new money rates -- where you are investing and kind of rate you are investing so far this quarter.

I'll take this again. For this quarter it is pretty much the similar as the last two quarters. In our investment grade book we are seeing our yields come in little bit higher than we are expecting so a little north of 4% which is a mixture of both pretax equivalent grossed up component on our municipal bonds and then regular corporate bonds. Those are really the two main areas.

And then just on your catch in California. Maybe talk to that it doesn't sound like you got tagged at all by wildfires. I'm not sure how much homeowners business you've got there. But maybe talk about how you are situated as the drought continues and undoubtedly fire events will continue.

Yes, California is actually an important market for us for home owners business. It's one of our larger markets, so it is an important market to us. With respect to the wildfires earlier in the year, it was really a nonevent for us. So we did not get hit severely with that at all. We underwrite wildfire quite extensively and thoughtful underwriters with respect to that capital. We feel good about that.

Thank you. Our next question comes from the line of Paul Newsome from Sandler O'Neill. Your question please.

Thanks to Progressive this morning auto claim frequency trends are sort of the discussion of the day. I wanted to ask if what the big insurers are saying is right that we are in an uptick in claim frequency, I guess two questions, does that sort of environment make it easier or hard to improve profitability for a company like Kemper? And could you talk a little bit about your abilities to change the speed at which you are able to change rates when you detect trend change?

Okay, you know, I guess first I would say that we continue to see what we refer to last quarter as almost a tail of two autos where our preferred auto book of business continues to have favorable frequency. That's true in the quarter and it is true when we look at longer trend line. However what we did experience last quarter and again this quarter is a real spike in frequency. and that is different than our longer term trend. So the question what does it mean for a carrier like Kemper? Clearly it's important for us to understand when we have a trend or an anomalous situation and respond appropriately. We began responding actually in February more aggressively to our non-standard book of business increasing our filed rate plan, taking more aggressive actions on under-performing books of business, agency management and looking at other processes that manage that portfolio for profitability so we began that process in February and we expect that to obviously have an impact on our book of business. So what does that mean long-term? If the trend stays about where it is clearly the actions we’re taking are going to make good progress. If the trend accelerates we will need additional action. So we will continue to be aggressive in taking the right action so that we can improve profitability. And in terms of how does it take to get actions into the book of business, clearly there are some actions that we move on and have a more immediate impact, others take effect as the book renews or for example we have been launching a new segmentation class plan within our non-standard legacy book of business and that needs to roll through the book for new business. So something's take a little longer as business renews and others we can put into the marketplace right away.

Thank you. Our next question comes from the line of Christine Worley from JMP Securities. Your question please.

I was wondering if you can just talk about the difference in reserving methodologies between United Alliance, the legacy book and Kemper and if so sort of if you are bringing that on to the Kemper methodology?

They being relatively new company and building their book had different reserving practices and we started aggressively with implementation and getting them on to our methodologies and building the data we needed to get the proper segmentation. So I would say we’re not entirely there with the entire amount of history we would want but we’re fairly, we’re far along the way to having them up on our reserving standards with how we would traditionally look at it.

And just looking at top line growth, it looks like the head winds they have sort of progressively being slowing especially in preferred auto and home, have you seen that continue into fourth quarter and how are you thinking about that a little bit longer term?

We like the trends that we've seen in our preferred lines, really auto, home and our other lines and that has been a multi-quarter effort around engaging our agents to business with us, writing more new business, retaining more new business and like I said this is a multi-quarter effort. Several quarters on the preferred auto, few quarters now on the home continuing to grow and our efforts continue, our agents continue to engage with us. So we are feeling optimistic about the progress we’re making.

Thank you. Our next question comes from the line of Adam Klauber from William Blair. Your question please.

How is the search for the new CEO and could you give us maybe give us some time parameters?

The search is going well. The Board is engaged in the process and I expect that there will be no trouble having my replacement in Board well before my announced retirement date.

And then on the investment side, how did the investment portfolio do this quarter?

For September, is that the question?

Yes.

Well it did pretty well. A little higher than what we would have expected or predicted. It came in at an annualized income, annualized book yield of about 8% and so that’s offsetting maybe our year-to-date, it's just a little under our expectations and so from a year-to-date point of view we are just north of 7%.

Do you account for that, is there lag on the accounting for that or is that results from the quarter get reported this quarter?

Yes, it varies on the type of investment we have. So about 15% of that of our book is -- there is no lag at all, another 30 there is about a month lag and then the remaining little over 50% is a three month lag.

Okay. Maybe too early, will there be some deterioration on the part that there is a lag, just because obviously last quarter was a tough quarter in a lot of financial markets?

It's a little hard for us to totally see out there in the future but the things that impact really our lagged portfolio is more the general economic conditions and refinancing conditions of the middle market and there really hasn’t been a lot of issues with that. There has been some volatility in the equity market obviously in the high yield market but that only has a small impact on the business that these LPs and LLCs are focusing on. So, again we kind of view it more as -- if the business is -- if the general economy is going smoothly, designed to produce some form of smooth earnings outcome and we always hope every quarter.

And then excluding the alternatives, what was your investment yield on the fixed book versus a year ago if you have that?

It is pretty stable in the mid-5s. I don't have that on the top of my head. Maybe it changed by just a few basis points.

And then on the homeowner's business, what sort of rate are you getting this year, and how would you characterize the competition of the homeowner's market?

For the homeowners market we’re getting low-single digits, mid-single digits on our rate about 4% on rate is what we have filed on our homeowners book of business, of course that will vary by state and in terms of the competition this continues to be a good line of business for us, there is a lot of value that our independent agents and brokers bring to policyholder as they advise them. There is certainly is competition in the line but I would say very different than the personal auto-line.

[Operator Instructions]. Our next question comes from the line of Edward Williams from Capital Return Management [ph]. Your question please.

Couple of quick follow-ups regarding the United Alliance deal and some of the adverse development there. Specifically the [indiscernible] indemnification balance. How large was it? Is it totally exhausted already or will have future or adverse development right to the bottom line for Kemper or is there any other means of recourse as adverse development continues?

So that general indemnification bucket was 12.5 million. And reserve development was clearly one of the items that would go into that bucket. And that 12.5 million is currently exhausted. It's not all from reserve development. There are other matters that are in there, so further fluctuations would drop down to our bottom line.

And then could you just help me maybe for 2014, if you could help me walk for United Alliance or Alliance United, pardon me, move from calendar year to accident year, and try to get an understanding of kind of point to development and any color as to which accident years they were allocated to?

I don't have a whole lot of detail on that, but the development we are experiencing is primarily from '14 and a little from the beginning of the first quarter of '15 also. that's the vast majority of it.

Okay, and more '14 than Q1 '15?

Probably a little more '14, but there's a decent amount from the first quarter of '15 also from pre-acquisition date '15.

Thank you. And this does conclude the question and answer session of today's program. I would like to hand the program back to Don Southwell for any further remarks.

Thank you, operator. As I said in my intro we had a solid quarter. Our businesses are making tangible progress in key areas and we have plans in place to deliver improvements in others. Our investment portfolio once again delivered good results. I'm pleased with our focus and look forward to seeing our efforts payoff for Kemper and for you, our shareholders. Thank you for your time this morning.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.