Todd Barton - AVP, IR Joe Lacher - President and CEO George Dufala - President of Property & Casualty Division Jim McKinney - SVP and CFO

Paul Newsome - Sandler O'Neill Bob Glasspiegel - Janney Matthew Carletti - JMP Securities Ron Bobman - Capital Returns

Good afternoon, ladies and gentlemen, and welcome to Kemper's Third Quarter 2017 Earnings Conference Call. My name is Gary and I will be your coordinator today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, the conference is being recorded for replay purposes. I would now like to introduce your host for today's conference, Todd Barton, Kemper's Assistant Vice President of Investor Relations. Mr. Barton, you may begin.

Thank you, Gary. Good afternoon, everyone and thank you for joining us. This afternoon, you will hear from three of our business executives, starting with Joe Lacher, Kemper's President and Chief Executive Officer; followed by Chip Dufala, Kemper's Property & Casualty Division President; and Jim McKinney, 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 the interactive portion of the call, our presenters will be joined by John Boschelli, Kemper's Senior Vice President and Chief Investment Officer, and Mark Green, Kemper's Life & Health Division, President. Before the markets opened this morning, we issued our press release and published our earnings presentation and financial supplement. In addition, we filed our Form 10-Q with the SEC. You can find these documents on the Investors section of our website, kemper.com. 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 2016 Form 10-K filed with the SEC as well as our third quarter 2017 earnings release and Form 10-Q. This afternoon's discussion includes non-GAAP financial measures that we believe are meaningful to investors. In our financial supplement presentation and earnings release, we have defined and reconciled non-GAAP financial measures to GAAP were required in accordance with SEC rules. And finally, all comparative references will be to the third quarter of 2016 unless we state otherwise. Now, I will turn the call over to Joe.

Thank you, Todd. Good afternoon everyone and thank you for joining us on the call today. Before we walk through our quarterly results, I want to provide a few comments from a long-term perspective looking at Page 3 of the presentation. We remained focused on building Kemper's overall value and our strategy underscores this long-term view. We continue to leverage our competitive advantages while building core capabilities to ensure we maximize shareholder agent and policyholder value. We continue to make meaningful progress on these fronts you'll see throughout the presentation. On Page 4, we provide our path forward unlocking the embedded value of the company. We made significant progress in our operations and on the profitability improvement targets we outlined in our strategic update. Not only we restored profit at Alliance United as promised, but our total nonstandard auto business is outperforming our expectations. We are more than $5 million ahead of our $20 million run rate expense savings commitment for 2017 and successfully rolled out the first way of IT platforms for both P&C and Life & Health. Additionally, we continue to attract and retain exceptional talent who want to be part of something great, where they have an opportunity to play a leadership role in reenergizing Kemper. During the quarter, we added several key personnel, who help us continue the positive operational and strategic enhancements we've made to-date. We remain committed to achieving our 2018 goals and improving normalized net income by $90 million per year by 2019. This improvement nearly doubles the company's average normalized earnings over the past several years. Now let's turn to Page 5 and look at our third quarter's results. Overall, we had a strong quarter; in total we delivered net income of $48 million or $0.92 per share in the quarter up from a loss of $16 million or $0.32 last year. Net operating income was $44 million or $0.85 per share for the quarter, compared to a net operating loss of $20 million or $0.40 last year. Results for 2016 included a $51 million after tax charge, which is $0.98 per share related to our voluntary Life & Health outreach efforts. Excluding net charge, net operating income increased $13 million or $0.26 per share. Earned premiums increased 7% to $598 million and net investment income increased to 11% to $86 million. Life & Health continue to be a source of stability for the company, earnings increased to $24 million accompanied by modest premium growth. In P&C there were several key highlights and nonstandard auto we increased earned premiums by nearly 20% while improving profitability. It's important to note that we are building one of the premier nonstandard auto franchises and it's becoming more evident with these results. Our preferred auto business saw profitability improvement that remains pressured. Recall on the fourth quarter to last year, we acknowledged that we relate in responding to increasing loss trends with appropriate rate and it will take several quarters before meaningful improvement we're seeing. We're now several quarters down the road and the improvement is materializing as promised. Chip will have more on this later. Turning to Page 6, we isolated the key sources of volatility in our earnings. In the highlighted section at the bottom of the page, you can see the underlying operating performance. This was a fifth sequential quarter of improvement. Most of the improvement over the third quarter of 2016 comes from our Property & Casualty Division, where our nonstandard auto lines drove a 6 percentage point improvement in the segments underlying combined ratio. Our expense management initiatives contribute to the improvement as well. Sources of volatility stand from the three main items, catastrophe losses, prior year reserve development and alternative investment income. Cat losses including hurricanes Harvey and Irma were $22 million after tax or $0.41 per share in the quarter. Adverse prior year development was less than $1 million after tax or $0.01 per share. Last we benefited from strong alternative investment performance which Jim will discuss. As indicated in last quarter's call, we continue to explore aggregate catastrophe reinsurance treaty options that have the potential during periods of elevated catastrophe losses to mitigate the impact of higher frequency, lower severity storms on Kemper's financial profile. Assuming appropriate negotiation of economics, we expect to have the new treaty in place for January 1. Furthermore in recent quarters, we've experienced an increased level of prior year reserve development. Claim practice changes make actuarial loss triangles inherently more difficult to read and often result in short-term noise. As I've told you, we've made and continue to make significant changes to our claims processes to meaningfully strength our franchise. This noise is entirely expected. The important thing to watch is the significant improvement in underlying operating performance which demonstrates our stronger ongoing franchise. Overall, we are pleased that our underlying operating performance is heading in the right direction. I'll wrap up my comments with our Life & Health division's results which are on Page 7 of the presentation. On the [technical difficulty] operating income improved to $24 million primarily from lower expenses and higher net investment income. This division continues to be a stable source of earnings with strong and predictable cash flows. Now I'll turn the call over to Chip to discuss the property and casualty results.

Thank you, Joe and good afternoon everyone. I'll start with nonstandard personal auto on Page 8 of our presentation. We have seen significant improvement across our entire nonstandard auto business. Earned premiums increased to $247 million for the quarter up $40 million or 19%. The top-line growth was fueled by rate increases and in increased new business. More importantly the growth was executed profitability as reflected by the improved underlying combined ratio. Nonstandard autos underlying combined ratio improved nearly 12 percentage points over the third quarter of 2016 as the business benefited from rate increases as well as underwriting and claims actions. We currently have a leading nonstandard auto franchise with $1 billion of annualized net written premiums and we are focused on continuing to grow it profitably. Turning to our preferred lines on Page 9, earned premiums in total were $184 million down slightly from last year and the underlying combined ratio were improved 0.5 point to 93%. The preferred auto underlying combined ratio continue to be elevated at 99%. In the fourth quarter of last year, we stated that we were a bit late to recognize the adverse loss trends that the industry experienced, but we're responding appropriately. We also mentioned that the preferred auto business would be pressured for at least a couple of more quarters. In the first quarter, we described claims challenges that added pressure and would take a few more quarters to resolve. We are seeing profitability improvement working its way through the book as rate increases and improvements in claims practices underwriting and other non-rate actions materialize. From a top-line stand point net written premiums decreased $2 million primarily from lower new business as we implement the necessary rate and underwriting actions. Looking at homeowners the underlying combined ratio was 86% about a 0.5 point higher than last year, premiums were down slightly. As we all know the big story for the P&C industry was extraordinary hurricane season, which included two of the largest hurricanes that made landfall in the United States in recent years. But we are not immune to these storms; our geographic exposure limited the impact. In total the company incurred $33 million of pretax catastrophe losses, $30 million of which came from P&C. This includes $18 million related to Harvey and Irma with the balance coming from smaller third quarter catastrophes and some modest development on first and second quarter events. In total, P&C had a great quarter even with the historic hurricane season. We continue to make progress on building the strength of our nonstandard auto business and improving the underlying performance in preferred. [technical difficulty] execute on our transformation. Together, these are critical to positioning the company for long-term profitable growth. With that, I'll turn the call over to Jim.

Thanks Chip and good afternoon everyone. Starting with investments on Page 10, this function continues [technical difficulty] strength for Kemper. We manage a diversified and highly rated portfolio that has performed well over time. Looking at the chart on the upper left, you can see our performance over the past five quarters. We delivered $86 million in net investment income in the third quarter, an $8 million increase from last year. The increase returned were driven by our diversified alternative investment portfolio, which outperformed our expectations for the quarter. The core portfolio produced slightly higher net investment income this quarter as the higher investment base was partially offset by a slightly lower rate. Overall, in the third quarter, the portfolio delivered a pretax equivalent annualized book yield of 5.8%, 50 basis points higher than the same period last year. On the bottom of the page, we've broken out the portfolio by investment type and provided the fixed maturity ratings. The portfolio remains conservative in nature with more than 75% of the portfolio comprised of fixed maturities and of those 90% are investment grade. On Page 11, we highlight our strong capital on liquidity [technical difficulty] financial flexibility. In the chart in the upper left hand corner you can see our parent company liquidity. At quarter end, we had ample liquidity with a $188 million in cash and investments as well as $384 million in borrowings available from our revolver and the insurance subs. Transitioning the capital, the chart in the upper right shows our insurance groups continue to be well capitalized at levels that exceed our rating requirements. Finally, our book value per share excluding unrealized gains on fixed maturities was $35.87 up 2% from $35 at year end. On Page 12, we have outlined our capital deployment priorities. Our first priority is to invest in the business which we accomplish by either funding profitable organic growth at appropriate risk adjusted returns or making strategic investments in acquisitions that enhance the business and meet or exceed our ROE targets over time. Our second priority is to return capital to shareholders. If there is capital that we don't think we will deploy in an appropriate time period, we will look to repurchase shares opportunistically and to maintain competitive dividends. Last I want to touch on two subsequent events the details are on Page 13. The first item is the California wildfires. The company expects the catastrophe losses and loss adjustment expenses that it has incurred from these wildfires in the fourth quarter will be significant and have the potential to trigger recoveries under the company's catastrophe reinsurance program. It is still early; we're still receiving loss reports and are in the early stages of the adjustment process. As such it is too early to assign and provide an initial estimate. The second item is the arbitration ruling announced earlier this month, where we were awarded damages of $84 million. As permitted under the award, we subsequently petitioned for the prejudgment interest at an annual rate of 9% and the reimbursement of legal fees and costs. We expect the arbiter to enter a final award before the end of the year. We are accounting for the award as a gain contingency. With that, I'm pleased to turn the call back to the operator to take your questions. Operator?

[Operator Instructions] The first question comes from Paul Newsome with Sandler O'Neill. Please go ahead.

Good afternoon and congratulations on the quarter, amazing strong, so good results no question. I want to ask about the, top-line growth and maybe just a little bit more about why it should be profitable growth and maybe a little bit more of a specifically where it comes from particular geographic region and et cetera in the nonstandard business?

Sure Paul. Chip and I will tag team this one. Thank you for your comments, I feel better if you hadn't said it was amazingly good, but, the growth is unit growth that we are seeing the big chuck of it is coming from California. And we're highly confident that it's profitable, because the book right now is highly profitable and its very consistent profile to what we've been seeing coming in. There is not much we meaningfully changed in that underlying new business. There is couple of other geographies that are generating in. But, overall very confident.

Paul this is Chip. I agree with Joe. We continue to take rate as appropriate, we've done a lot of work with our underwriting guidelines and our claims organization as we continue to find tune it as enabled us to continue to grow profitably and [Technical Difficulty] term so of rate growth probably 2/3rd of that's coming from rate and then probably and the third is coming from unit growth.

Fantastic, I'm afraid you're cutting out; I don't know if it's cutting out for other people as well. But, I did have a second question, I want to ask about the expense ratio in the quarter for the property and casualty side of the house, it was also a little bit lower than I expected, and I wanted to know if there was anything in there that was of one-time nature or is that was a reasonable run rate and as we think about perspectively?

Yes Paul, I'll apologize, we've got a set of mics in here that keep losing their Bluetooth connection. So, it's a comedy to watch us as we're jumping up and down trying to figure out which mic is actually working at the moment. So my apologies to everybody on the call. From an expense perspective, I mentioned earlier there were $5 million ahead of our $20 million commitment for 2017 expense reduction. And we're largely pushing those expenses off the board, there is nothing particularly unusual in there, it's just the results of us continuing to work sort of looking at every nickel at squeezing out that.

Great, thank you.

The next question comes from Bob Glasspiegel with Janney.

Good afternoon Kemper. The 85% I heard was fantastic, hopefully the transcriber got it, but maybe you might want to submit the rest to the services or to put another…

Yes we'll get the revised version to the transcript guys for what we missed. Again our apologies.

Now the just, I think we could follow it pretty carefully, so it is a good job on that. You said, you want to continue the profit restoration in Alliance United sub suggesting you are not quite ready to declare victory, I mean there was a pretty solid results in that line and what more needs to be done before the victory?

Yes, if I just strike it that way Bob, then I picked the wrong word as I accept of myself I think we've definitely concluded that we've successfully restored the profitability in Alliance United and we're focused on profitably growing that business.

How fast could you grow it in the current environment, assuming that this is fixed?

My sense a little bit and we got actually almost have a challenge the other direction, I think we applied three doses antibiotics and maybe we only needed two. So, we've got a tweak that a little bit the prism of the profitability improvement actions may still be repellent through and we've got to work on shifting ourselves towards growth. We believe we had high single digit unit growth in the quarter there and anticipate that we could do better than that. And we're upon the appropriate levers just sort of shift directions. We definitely think it will be above the marketplace growth.

By the first quarter next year you think or soon?

I think it's above the market now and I think we can improve on where we are.

Great, on the California fire, I assume its homeowners mainly or there is some other lines that sweeps in and what was your exact word could hit your retention, top of your retention or is likely to what was the qualifier?

Yes thanks Bob. The comments that it made it, it has the potential to which I think if we're quite [Technical Difficult].

[Operator Instructions]. The next question comes from Matthew Carletti with JMP Securities. Please go ahead.

Hey thanks guys.

Matt, I want you to hold on a second. Let us finish answering Bob.

Yes, yes absolutely.

We were again, we're getting new mics. We had a big quarter, we're buying new microphones. Jim and I were tag teaming. The comment was, we've said potentially hit the retention so, not trying to be passwords or be too queued on it, but it could hit the retention. Its early in the process we're still getting claims it is principally homeowners event, they want service and modest number of autos in there, but it is principally homeowners issue. And Bob jump back and if I missed part of that. Go ahead Matt.

All right, thanks. First of all congrats on a nice quarter, I want to echo Paul's comments. And I guess, first I have a couple of questions. But first is on preferred auto Chip, I think you made the comment that, you're still kind of working through a few more quarters of improvement there. What would you view is kind of a target, combined ratio level kind of how when you look at nonstandard and say we're kind of there back to growth mode kind of where do you think we get and preferred before you kind of feel comfortable kind of feeling the same way?

Thank you, Matt. We're really targeting, where I'd like to be is in the, into mid 90s mid to high 90s combined. You work within a 10% to 12% ROE [Technical Difficult]. Matt I'm sorry, it looks like we lost you there. Let's make sure that you heard my answer.

I got you right after 12% ROE a cut out.

Okay, and so we generally like to target a 96 to 97 combined ratio for that business and if we can hit that we will be very pleased.

Okay great. And then on commercial auto, the kind of the underlying was a, it took a uptick in the quarter went a little hot, what was going on there anything in particular, as a smaller segment?

We continue to see noise with. [Technical Difficulty].

Matt I lost you there again our apologies. Essentially what you're seeing in commercial auto is, as we've looked at that book and we've spent a lot of time with the claims team, adjusting the losses looking at some of the claims that we were to have on the books, we've seen a little noise in those numbers that again as Joe had mentioned regarding our other lines of business that's not unexpected and there was a, just a little prior year development there.

Got you. And then last question sticking on that business, longer term do you view commercial autos kind of a core business to Kemper, do you expect it to grow it, is it not a core business and stay tuned?

At this time it really kind of to be determined, it's something that we feel makes sense we continue to watch it, it presents an opportunity we don't want to close any doors as we've transformed as an organization we feel there is a good connection there potentially to nonstandard auto and we want to just have those options available to us.

Great, thank you very much for the color and congrats on the quarter.

Thank you, Matt.

The next question comes from Ron Bobman with Capital Returns. Please go ahead.

Hi good afternoon and congrats on the fine, fine results and improvement. I had a question about the wildfires and I understand its early days and it's still developing as far as information is concerned. But actually its reinsurance program, is it crystal clear that the fires are considered one event, multiple events as to some degree of uncertainty in that regard or not? Thanks.

Ron this is Joe. Our reinsurance programs, sorry I was looking at, our reinsurance program have a clear definition in them around the timing and geographic distance. I believe we have a 250 mile radius and a 168 hours and the contract allows us to pick the center of that event and it picks the start time. So, we'll go through the process of looking where our losses are and determine the optimal start and stop of that.

And just like cut to the chassis, it sounds like I am sure you've done some preliminary review that you are whatever highly confident or very confident that is going to be largely considered to one event as far as sec retentions are concerned?

We do not see anything that would suggest that we could possibly have a number big enough to pierce two retentions. I'm back, we don't have anything to suggest, we could pierce two retentions. So it's possible there could be some losses from the fire that if are making up numbers now illustratively, but if we had a number that went through the retention and had the numbers that went against the reinsurance treaty its possible there could be some losses that were outside of that treaty. That maybe be outside of the 250 mile radius or outside of the 168 hours. The bulk of what we would expect would be inside of that, inside of that range.

Okay, so if you don't need any marginally adverse not all that material, I think what you are saying…

It's correct. I would not think it would be materially outside of that, there could be marginal items that's the way to think it better.

Okay, prefect. Thanks a lot.

This concludes our question-and-answer session. I would like to turn the conference back over to Joe Lacher for any closing remarks.

Thank you, operator. And before I sign off, I just want to provide you a couple of quick closing comments. First, you should expect that next quarter's earnings will be $500 down, because we're buying new microphones. Beyond that overall Kemper had a strong quarter. It was our fifth consecutive quarter of improved underlying operating performance. While we recognize we still have work to do before achieving target profitability and optimize growth across each of our businesses. We're pleased with the significant progress we've made on our turnaround. We continue to attract and retain exceptional talent who want to play a leadership role and reenergizing Kemper and building something great. We are focused on building a premium nonstandard auto franchise and our strong results demonstrate our progress in this initiative. In preferred auto we're pleased with the impact of the profitability improvement actions we initiated in the fourth quarter of last year and then materializing as promised. Our Life & Health business continues to perform well with higher net income and earned premiums in the quarter and our investments function remains a source [Technical Difficulty] of strength and is indicated, as indicated through this quarter's results. Thanks for your time today, and thanks for your interest. I apologize again for the telecommunications problems and we appreciate your patience. We look forward to updating you again next quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.