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Kemper Corp
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Good afternoon ladies and gentlemen, and welcome to Kemper's Second Quarter 2019 Earnings Conference Call. My name is Sean and I will be your coordinator today. [Operator Instructions]. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. I would now like to introduce your host for today's conference call, Christine Worley, Kemper's new Vice President of Investor Relations. Ms. Worley, you may begin.
Thank you, Sean. Good afternoon everyone and welcome to Kemper's discussion of our second quarter 2019 results. This afternoon, you'll hear from Joe Lacher, Kemper's President and Chief Executive Officer; Jim McKinney, Kemper's Executive Vice President and Chief Financial Officer; and Duane Sanders, Kemper's Executive Vice President and the Property & Casualty Division President. We'll make a few opening remarks to provide context around our second quarter results and then we will open up the call for a question-and-answer session. During the interactive portion of our call, our presenters will be joined by John Boschelli, Kemper's Executive Vice President and Chief Investment [Phonetic] Officer; and Mark Green, Kemper's Executive Vice President and Life & Health Division President.
Before the markets opened this morning, we issued our earnings release and published our second quarter 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 at 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 2018 Form 10-K, as well as our earnings, our second quarter 2019 Form 10-Q, and earnings release. This afternoon's discussion also includes non-GAAP financial measures, that we believe are meaningful to investors. One such measure that I would like to highlight again is as adjusted for acquisition. It is clearly important to understand our reported results, including the impact the Infinity acquisition had to Kemper overall. However, investors have also expressed an interest in understanding the underlying organic performance of the combined businesses. Since our as-reported financials don't include Infinity's historical information prior to the closing of the acquisition and our current results include the impact of purchase accounting, the underlying trends are not easily visible.
In an effort to provide insight into the underlying performance of the combined businesses, we also display our financials as adjusted for acquisition. This view removes the impact of purchase accounting and includes historical Infinity information to more easily provide a meaningful year-over-year comparison. In our financial supplement, presentation and earnings release, we have defined and reconciled all the non-GAAP financial measures to GAAP, where required, in accordance with SEC rules. You can find each of these documents on the Investors section of our website at kemper.com. Finally, all comparative references will be to the corresponding 2018 period, unless otherwise stated.
I'll now turn the call over to Joe.
Thanks Christine. Good afternoon everyone and thanks for joining us on today's call. Pleased to announce yet another quarter of strong financial and operational performance. This performance wouldn't be possible without the determination and focus of our associates coming to work every day, dedicated to delivering outstanding results. This quarter demonstrated our continued progress, in growing our portfolio of specialized businesses, which in turn has resulted in meaningful, long-term value creation for our shareholders. We also took actions this quarter to further strengthen our balance sheet and enhance our financial flexibility. Jim will provide more detail on these later in the call.
Before discussing the specifics of our quarterly results, I'd like to note that on July 2nd, we celebrated the one-year anniversary of our acquisition of Infinity. The transaction significantly accelerated our progress in becoming a leader in specialty auto business, giving Kemper the scale to further enhance our product management, claims effectiveness, ease of doing business and expense efficiencies.
As we reflect on this anniversary, I'd like to highlight three key points; one, we significantly exceeded every financial target we announced at the time of the transaction. Two, our approach to integration has created a premier specialty auto franchise. And three, we have a strong team of experienced Insurance leaders, with proven ability to drive profitable organic growth, and to execute strategic and successful M&A. All of this demonstrates our ability to enhance Kemper's competitive profile and grow intrinsic value. We look forward to deploying these skills across our portfolio of specialty businesses.
Now let's turn to page 4 and review the highlights of the second quarter. Overall, we generated industry leading organic growth, while maintaining a strong margin and balance sheet. We continue to create shareholder value as demonstrated by our 39% increase in book value per share and 35% increase in book value per share, excluding unrealized gains on our fixed maturities.
Looking at our return on average equity, excluding unrealized gains on our fixed maturities, we produced a 13.3% return, in line with our stated goal of delivering a low double-digit ROE. We delivered strong improvement in the underlying fundamentals of our business. Earnings per share increased 152% to $1.84 per share, while adjusted consolidated net operating income per share increased 97% to $1.38. Earned premiums grew 70% on a reported basis, 8% on an as adjusted basis. In our Specialty P&C segment, we reported very strong results, with an underlying combined ratio of 93% and 10% growth as adjusted.
While we continue to have policy in force gains in California, we saw an increase in growth across a wider range of geographies. We previously highlighted that it would take time to deploy our combined strengths to generate these results. We're pleased to report that this quarter, we delivered double-digit profitable growth outside of California. We're pleased with the 3% earned premium growth in our Life & Health business, as we begin to benefit from investments to improve our capabilities. Despite some one-time benefit charges in the quarter, the business continues to provide stable cash flow and diversification benefits.
Our Preferred P&C business turnaround continues. As we've said before, this process takes longer and results are more volatile on a quarterly basis than we would hope. But we remain committed to generating an appropriate shareholder return in this business.
From a financial strength standpoint, we currently maintain over $870 million of available and contingent liquidity. This, coupled with our strong current debt-to-capital ratio of 17.5%, provides us with financial -- significant financial flexibility.
With that, I'll hand the call over to Jim, to discuss our consolidated quarter results in more detail.
Thank you, Joe, and good afternoon to everyone on the call. Let's turn to page 5 to discuss the second quarter financial results. As Joe mentioned, this was another solid quarter for Kemper. We continue to generate strong top line results, while growing profits and returns.
Earned premiums increased to $1.1 billion or 70% on an as reported basis, driven by organic growth from each of our businesses and the acquisition of Infinity. On an as adjusted basis, earned premiums increased 8%, primarily the result of a 6% increase in policies in-force, within our Specialty P&C business segment. Top line growth improved underwriting performance and the successful integration of our Infinity acquisition, led to robust growth in net income, net income per share, and adjusted consolidated net operating income per share.
Net income for the quarter totaled $122 million, up $85 million from the prior year quarter. Net income per share on a reported basis increased $0.73 to $1.84. On an as adjusted basis, net income per share increased 90% to $1.90, Adjusted consolidated net operating income per share on a reported basis increased from $0.70 to $1.38. On an as adjusted basis, adjusted consolidated net operating income per share increased 43% to $1.44. These results led to growth in book value per share and book value per share excluding unrealized gains on fixed maturities.
Moving on to page 6; we isolate the key sources of volatility in our earnings. Adjusting for these sources of volatility, our underwriting operating performance is relatively in line with previous year. Kemper continues to benefit from the addition of the Infinity business, which is helping us drive strong growth in underwriting profitability within our Specialty P&C segment.
I'll now turn the call over to Duane, to discuss the results of our P&C segments.
Thank you, Jim, and good afternoon everyone. Earlier, Joe noted the milestone anniversary of our Infinity acquisition. I'd like to reiterate that the combination of our two entities has been successful in accelerating our progress towards becoming a premier specialty auto franchise. By leveraging our core capabilities and harnessing the strength of our talented and committed team, we've achieved harmonized operations and enhanced revenue growth. These efforts, along with many others have resulted in in a successful second quarter.
Looking at our Specialty P&C Insurance segment results on page 7, as with the prior three quarters, I will review this business on an as adjusted basis, including Infinity results in all prior periods.
Earned premiums increased to $766 million for the quarter, up 10% over the second quarter of 2018. Policies in-force increased 6%. The top line growth remained above industry average, while producing very strong profitability, driven by our continued market and product strength.
We remain focused on generating growth and increasing market share, while maintaining appropriate underlying combined ratios. In the second quarter, Specialty Auto's underlying combined ratio was 93%, largely consistent with the prior year. We continue to further enhance our capabilities, delivering value to our customers and generating disciplined profitable growth.
On page 8, you will see the results of our Preferred P&C Insurance segment. Earned premiums increased to $189 million for the quarter, up 4% over the second quarter of 2018. The underlying combined ratio increased for the quarter to 94%. I'll discuss the drivers separately by product line.
In the Preferred Auto business, we remain focused on achieving an appropriate underwriting margin. In the quarter, earned premiums increased 9% and the policies in-force increased 3%, reflecting continued rate activity.
Turning to our Homeowners' and Other business; the underlying combined ratio was 83%, roughly three points higher than last year, primarily driven by intra-year development on non-catastrophe large losses. Our policies in-force decreased about 5%, as we continue to diversify our cat exposure. Despite a relatively, active cat quarter for the industry, we didn't experience the same magnitude of losses.
We've commented on this in the past, particularly when we're seeing losses proportionately higher than the industry, and given the modest size and concentration of our book, industry results are not always a good indicator of our cat losses. While underwriting results in this segment remain below our profitability goals, we expect improvement actions in claims, rate and underwriting, will move us towards our desired results.
On a final note in July, we announced that we entered into a marketing agreement to begin transitioning our classic collectors book of business to Hagerty. This book had $16 million in annual premiums in 2018. The transfer is proceeding as expected.
I'll now return the call back to Jim.
Thank you, Duane. Our Life & Health Division's results on page 9 of the presentation. The team's continued focus on enhancements to our agency capabilities and process improvements, resulted in earned premium growth of over 3%. This quarter, the operating profit for the business was impacted by higher one-time benefit cost and an increase in expenses, as we are enhancing our products and investing in our service and technology platforms, to further develop our capabilities in target markets.
Turning to investments on page 10; our portfolio remains diversified and highly rated, as demonstrated on the bottom left of the page. Looking at the chart on the upper left, you can see the investment performance over the past five quarters. This quarter, we delivered $96 million in net investment income. The core portfolio produced higher net investment income, largely due to the addition of Infinity's investments. This resulted in a pre-tax equivalent annualized book yield of 4.7%. This is down from 5% in the second quarter of 2018, due the shift in asset mix, driven by the addition of the Infinity portfolio.
On page 11, we highlight our strong capital and liquidity position. In the second quarter, operating cash flows increased $30 million to $148 million compared to the second quarter of last year. This was a result of increased scale and disciplined operational and financial management. Turning our intention to the chart in the upper right of page 11, you can see that our insurance groups remain well capitalized. In the upper left hand corner chart, we present parent company liquidity. During the second quarter, we took advantage of favorable market conditions, and the ability to replace expensive hybrid securities, with permanent capital, to further strengthen our capital position. In May, we repaid a $35 million term loan with cash on hand. In June, in a series of transactions, we raised approximately $130 million through a common share offering, entered into a new $50 million term loan and increased the borrowing capacity of our revolving credit facility to $400 million.
Subsequently, in July, we used the proceeds from the equity offering, together with a portion of the new term loan to redeem the $150 million, 7.375% subordinated debentures, due 2054.
At quarter end, we had substantial financial flexibility, with $313 million in cash and investments and $660 million in borrowings available from our revolver and our subsidiaries. Our debt-to-capital ratio at the end of the second quarter was 19.2%. As a result of the aforementioned capital actions taken after the quarter closed, we currently have $213 million in cash and investments and our debt-to-capital ratio has decreased 17.5%. This action decreases our long-term weighted average cost of capital, and provides us with high quality capital structure, with appropriate flexibility.
With that, I'll turn the call back to Joe for closing comments.
Thank you, Jim. Our long-term perspective remains focused on building Kemper's overall value and this quarter demonstrated our ability to do so in three key areas. First, our financial results highlight the strength of the insurance platform we built. The disciplined approach to our portfolio of specialized niche-focused businesses, again produced revenue growth, solid earnings and shareholder returns.
Second, the continued earnings ROE and tangible book value accretion obtained from the Infinity acquisition show the value we're able to create for our disciplined approach to acquisitions. Lastly, as Jim just discussed, we continue to further enhance the composition and flexibility of our capital structure. Thanks to our entire team, our strategy and business model continues to perform well, expanding Kempers reach to serve specialty markets with easy to use, affordable and appropriate insurance and financial solutions.
Now I will turn the call back to the operator to take your questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question today will come from Greg Peters with Raymond James. Please go ahead.
Good afternoon. I wanted to revert back to slide 7 in your presentation, and I noted that on an as adjusted basis, your policies in-force were up almost 6%. Can you talk about where that growth is coming from? Is it coming from a stand in your geographic footprint, or is it in your existing states? And can you also dovetail comments on that with conditions in California and Florida?
Thanks Greg. Will gladly -- Duane, maybe you give some comments and we will tag team a little bit.
Yes. Got it. So I think the first part of your question was the 6%, is that -- is that coming from new markets or in places that we currently play. So we are growing in existing markets and this is an introduction of new state. It's actually expanding the growth in existing, and as we've talked about before in terms of kind of diversifying the book away from the concentration out west, we've been able to successfully do that and continue to add PIF on that side. And the second part of your question, can you can you ask that again, I want to make sure I got that?
Conditions in California and Florida?
Yes. So from a market perspective, we were -- we feel good about where we are. We have an opportunity to continue to grow in California. Even though, we're a sizable player there, and that continues to show growth. In some of our other core states, whether that be Texas or Florida, we feel the same about both of those. We continue to find opportunity. We watch the marketplace, we look at the other players, and kind of get a sense of what they're doing and how they're responding in that and then we move the business forward to how we think it's going to turn out to -- with the desired kind of outcome. So again, we participate well in that space, and we're going to continue to watch those and take advantage of the opportunities that are presented to us.
Okay.
Greg, what you are trying to get at -- I think, Duane was getting at, and we were talking about it earlier, the marketplace is -- we're seeing a little bit more competitive activity in Florida, but still feel like we're well positioned there. And California is still a reasonable environment, we're not seeing anything crazy from a competitive perspective there. Is that what you were trying to get at with that?
I think that -- yes, absolutely, and I note with your expense ratio being so low, that it's got to be a critical advantage for you guys. But can we pivot to slide 8, and I wanted to just spend a minute -- and you talked about the underlying loss ratio on auto trending up, and I know you said don't get too hung up on one quarter's result. But can you give us a sense of what you mean by impact from business mix and for the auto, what's your longer-term target?
Yes. Let me give a shot at that and then Duane could provide color or nudge me back. And Greg, I'll actually make this comment with slide 8 on preferred, but I'm going to actually expand that a little bit and make a similar one on specialty. What we're seeing in both of these businesses, is the mix impact, and I'll use specialty as the example first. You were asking about growth. We are still growing in California, but probably closer to the state's population growth rate or maybe a little more. We're seeing a bigger growth in that -- in Texas and Florida, we're seeing some very high percentage growth in some geographies outside of Texas and Florida and California. But they are more modest states for us.
So if you add it all up, the PIF growth, most of it came outside of California. You had big chunks in commercial vehicle. When we look at the programs, as an example, our commercial vehicle business runs a little higher expense ratio, but has a better loss ratio. Our Alliance United product in California has a more attractive expense ratio, largely because it's fee income, but we -- as a result, it can run with a higher loss ratio, we're running all of those thinking about the total combined ratio. So you can get some quirky things sometimes when the mix is shifting, where it looks like the expense ratio is running up or the loss ratio is moving in a different direction, because of intentional thought processes on our part about how that mix works together. It's more appropriate to have that expense ratio. In commercial vehicle, its more appropriate to have the fee structure we do in Alliance United, and as a result, we manage the loss ratios differently.
Similarly in Preferred, as we look across the different states where we're growing and we look across the different products we have, whether it's our new prime product or some of our legacy products. In some cases, they have different commission or expense structures, and as a result, they have different underlying loss -- permissible loss ratios, that can cause some geography difference between the components of the combined ratio. We don't typically provide target combines, which I think was the last part of your question. We do reference the fact that we are targeting a low double-digit ROE, and once that's achieved, growing the organization, and you can do some capital assumptions in each of the product lines that it will get you close to a target. But given the mix of product lines we have, it becomes not a great idea to give individual targets. We start to get very precise at that point.
Those are great answers. The last one that I have -- yes, go ahead.
Greg, this is Jim McKinney. And if I could add on, I just -- I don't want folks to potentially miss this. If you look at pages kind of 37 and 38 of the supplement, there we provide the underlying combined ratios as adjusted, where we've essentially kind of normalized the purchase accounting adjustments. What you'll see there is through six months for our Specialty Auto business, we've got an underlying of 92.7% versus a year before that of 93.5%, and if you look at just the Personal Auto with inside specialty, which is on the supplement, page 38, you can actually see we were running a 93% combined ratio for the first six months this year on an underlying basis, which is about 0.1, 0.2 roughly in line, with where we were at, a year ago. So you're seeing that, while we have continued to obviously grow faster than the market, continue to make market share gains, both in terms of California and then now you're really starting to see a pick-up outside California, where we continue to demonstrate the same consistency in margin, but at that same point in time, picking up policyholders much faster than what the market is growing.
Jim's highlighting there, Greg, the -- there are some purchase accounting numbers that run through with sort of quirky quarterly pieces. And they have a swing -- one was a help last quarter, and one was a hurt this quarter. So if you're picking up the expense ratio and you're trying to do sequential quarters, your head is going to scramble on that, which is why we got the as-adjusted, and which is why really, looking at the six month numbers on 37 and 38, does a much more accurate job of projecting what the underlying trends of the business are, without getting into the quirky purchase accounting piece. But there is enough going on in those two quarters of GAAP stuff on the expense ratio that you could easily make the wrong conclusion that something was going south.
Right. Thanks. Those -- that's a great color. I just -- the final, final question, I know there's others who want to ask questions. Just -- can you just broadly talk about frequency and severity across your book in auto and how the trends were in the second quarter?
So I don't think we're largely outside of industry on the frequency piece, where it continues to -- I guess, behave well. On the severity side, we see a little bit on the BI side, particularly in California. I don't think we're seeing quite there what industry is seeing. But that's -- again, I don't think we're a unique industry at large, otherwise maybe somewhat be more moderate, based on our limit distribution. So I don't think there is anything else to add on that or any other color.
Okay. Thank you for your answers.
Our next question will come from Paul Newsome with Sandler O'Neill. Please go ahead.
I was hoping we could turn to the Life Insurance business and if you could help maybe parse out the piece that is -- truly one time, the mortality and mobility pieces you were talking about, as well as talk to more about these expenses. Obviously, it's a pretty substantial earnings impact, if we have a new run-rate that -- what was reported this quarter?
Yes. Thanks, Paul. Great question. I'm going to take it in a couple of pieces here, just hopefully trying to keep it simple, and then we can come back over the top, if that's all right. The first one and I think the simpler one to kind of roll through, is really inside our Life component with, inside the Life & Health segment. Inside there, you've seen really a one-time kind of benefits increase of roughly $3 million inside that group, a 100% one-time from that perspective. In addition to that, you saw roughly $2 million of expense, that would be one-time items that are there. Again, purely episodic related to some investments in the business, and then you saw a couple of other items that are inside, if I were to phase it, about $2 million inside that segment, that would be, I wouldn't say sporadic in nature, but they are one-time, they are not items that you wouldn't necessarily expect to see on a quarter-over-quarter basis. But you might expect us to incur that expense on 12 or an 18 month type period. In some of the items that go into that, include expenses associated with some rate filing preparation and some other things that are inside our Life business. They are a little bit less frequent than what you might normally see on the P&C side, and so that can create a little bit expense noise.
On the Health side, you saw really as we've highlighted and called out about, $4 million related to a one-time -- really review of the business. And as we've continued to see a little bit of -- good growth inside that business and as we become more seasoned, what we saw is similar to what you could see in some other things we had, some older claims are in there and a few additional ones that are going to end up settling a little bit higher than what our initial assumption was. That's not really a run rate impact per se, in terms of what we're seeing coming in, but it represents really the catch-up of multiple years of business inside there, and just us having an enhanced view in terms of what might be some of the severity associated with some of those older or long dated claims.
Nothing to kind of -- overly kind of think about or try to run rate in terms of your numbers, really kind of one time in total. And then when you look at some of the other things, you see that in total, we've shown good growth inside that those -- that segment. The net result of that is a little bit of upfront expense pressure that comes in, again, the remaining component there is about $2 million, and what you see there versus say in the P&C segment, and it's really kind of a mission design program, if you will, is that some of the benefits that earn out over time. where you normally DAC again not to get too much into the accounting, because some of these additional costs aren't specifically subscribed to a particular policy of that, you have an upfront expense associated with them, versus seeing that kind of over the life of the policy.
So they're there, they're are part of the business, but it's not -- again something that I look at and say, hey, as our underlying cash flow projections growth, margin sustainability inside the business segment change, I don't believe it has the way, I would think about that. If I were modeling out the Life & Health segment is, look at the run rate over the last 12 months, I think that will give you a good indication of where things would be. I don't see any real material changes from that, and I really don't see any material changes from where I'd expect the year to turn out from what our expectations are.
Great. And then my second question, could you just give us a little bit more color on the investment side? You had a fairly remarkable investment return this time around, and it sounds like alternatives helped out as well. Maybe talk about sort of the sustainability of that as well.
Yes, Paul. Thanks. Yes, I think we feel good about overall investment portfolio. The results that we have both achieved this quarter and over time. There is not a meaningful change. Well, there is no change relative to the strategy or how we manage that or how we pick things. I think what you're seeing is just the benefits of our continued execution in that capability. We think we've built out some strong investment skill-sets and we think that those have played out over time and nothing there to note this quarter versus any others. Just really continued day in and day out execution.
Thank you.
Our next question will come from Gary Ransom with Dowling & Partners. Please go ahead.
Yes, good afternoon. I wanted to talk about competition also, when I look across the market, companies are all -- standard companies, standard auto companies are looking to grow. They've all reached acceptable profitability or gotten close. And I just wondered if you're seeing any change in the nature of the competition, and whether it's coming from other companies that are may be broadening their appetite, and I'm really just trying to get a sense of the level of competitiveness that you might be seeing in the market.
Yes. Hey, Gary, this is Duane. I'm -- yes, it's still a relatively firm market. I don't know that there is additional players in this space. Sometimes you'll -- we'll watch the activity obviously in the states we participate, you'll see some pricing move and particularly in the specialty market, and where we stay focused on that. But it's not -- I'm not seeing new players. I see the same players. I still see call volumes are still in place. So I -- nothing materially has changed. It's not like we're seeing others that weren't participating before, they are now participating. The cohort of competitors are fairly consistent.
Okay.
What we are answering that Gary, assuming you're asking the question of our people sort of crossing streams and moving from preferred into non-standard and we're not and -- we're not seeing a lot of softening in standard. There is Duane, is it fair to say, a little bit more competitive dynamic going on in the Preferred space, but not to where we are seeing it being really stupid.
No.
Is that what you were getting at Gary?
Yes, that is what I was getting yet. Yes. Thank you. And one other thing, I noticed in the Q, in Commercial Auto, it mentions frequency of claims as a contributor to the lower loss ratio there. Is that any kind of trend or is that just a random variation in the quarter?
Yes, I think we look at it is -- we like to think that it's good execution and selection, when it's happened for several quarters in a row, we will confirm that. I don't -- the book is big enough that it shouldn't be purely random, given its limits profile. But I'm not sure I'm ready to declare that we've got two years of dramatically less loss trend. It's just -- for that and for the period, we saw some less -- some lower frequency. We're pretty good at this end of the market, and intend to do a nice job of attracting a good underwriting profile.
I know, is that commercial book -- a book that you think you can grow as well?
We've had several years of double-digit profitable growth. So we're thinking that's way more than a pattern. We believe we can continue to do that.
Okay.
We're at the small end that commercial vehicle. We are not dealing 50, 00 vehicle fleets, we're dealing with one, two, three vehicles, a couple more artisan contractors. We're filling a void in the marketplace. It matches up well with our Specialty Auto business than we're operating it, in a particularly thoughtful way, we're not getting caught up with some of the other noise or challenges that other folks, I think have, in the commercial auto space. Very much like Specialty Auto is different than Preferred Auto. We're playing in a section of that market, that's different than we think. Like I said, there has been, I think, mid-teens growth for more than two years. I just don't remember off the top of my head what it was, because I don't have Infinity statistics in my head, quite as well as the Kemper ones.
Great. All right, that's helpful. Thank you very much.
Our next question will come from Adam Klauber with William Blair. Please go ahead.
All right, thanks. Good afternoon. On the Life business, Jim, you said that -- look at the last I think, four quarters or so. Does that include that this quarter, that again, you had a bunch of one timers in the -- what you consider a run rate?
No, I would take the previous kind of four quarters, Adam, from there and I think that will give you a pretty directionally accurate number. I would not include this particular quarter, in terms of that run rate.
Okay.
You might start with a base, but from an estimate in terms of how I'm looking at modeling, what I would expect to happen, kind of given the information I have now, I'm basically looking at where it's been over the last four quarters. Previous [Technical Issues] and nothing in that thesis has changed.
Okay. And then as far as the loss ratio on those or the benefit ratio on the Life business. This is the second time you've adjusted in three quarters, is -- and I've always thought of that business as a lot of small policy, so I am surprised to see this much adjustment -- this much of adjustment in the last couple of quarters. So is there a pricing issue, is it changes in mortality, what's the dynamic that's causing this variation?
And I think unfortunately, little wonky. Normally there's kind of one quarter a year that you end up a little higher than what you were anticipating from a frequency of occurrence, and you usually get one quarter, where it's a little bit lower. When you're looking at kind of this run rate -- it's more of a -- and I don't mean this in official, but if you're kind of flip and heads or tails, and I don't mean -- it's not like it's purely sporadic. But in terms of what creates that noise, it could be a flu season, it could be a bunch of different things. This year it happens to kind of be inside this quarter. Again, I would not look at that, as being some type of trend or different, standing from where it's historically been. It's just unfortunate pattern and nothing is going to really change there from the long-term underlying economics of the business.
It's not lost on it -- lost on it, Adam, it's two of the last three, and then it starts to feel like it's a pattern in the other direction. But what we're telling is, we dig underneath it and are looking at all the components. Our best guess is the four prior, excluding the current quarter is the best view of what it is going forward, and it's just hard without getting into a level of minutiae that I don't think you really want to get into, to sort of see the underlying pieces.
Yes, I appreciate that. And I know there is a lot that goes into benefit ratio. Are you changing or is there a need to change your pricing on either the Life for A&H product?
The Life business, we've made some pricing changes in the last year, year and a half. They were not related to any of the benefit issues that we're talking about. They were relating to our broad view of mortality, tables, the investment environment, all the underlying components and assumptions that we've got inside of the product and where our mix was going. So they were disconnected from this. We've been in the process of making some pricing changes in our Health business, over the last 2.5 years and that behaves -- in some cases, a little bit more like a P&C business, when you're thinking about it from a pricing perspective, where there is a frequency, a severity, your working trends, your working mix as it behaves a little more like an Auto book might and we're plugging along with those constantly looking at those, and moving. This will certainly factor into our thought process inside of that space, but again they are 12 month policies and it will work its way through, much like you were changing prices inside of Homeowners. But there is nothing we've seen in the last -- those two of the last three quarters, where you saw one-timer's, but suggesting to us that we have our pricing assumptions off.
Okay.
So I answered the question on pricing action we're taking. I think what you're getting at, is there something that makes us change our view on pricing, because of those losses and they have not materially changed our view there.
Okay.
And Adam, just a quick [Indecipherable], it's roughly a $4 billion serve of basically average life policies of $5,000. So when you are thinking about that, a 0.1% change kind of in your frequency or other elements, right, can have a -- can have a swing like this. And that's just not -- when you're thinking about kind of what's normal volatility, that's just not outside of what you would expect, with a book like that, of that size.
Okay. And then on the expense side, for Life and Health, again, the last year you had a run rate of, to whatever, $78 million, $80 million, you jump up to$87 million. Why did it jump up this quarter? I mean, is it related to the jump up and losses, total separate, I mean what did they both hit this quarter?
Can you help us -- and I want to make sure I'm answering the question specifically, can you point me to what exactly you're looking at, because I don't want to answer the wrong question?
Sure. The insurance expenses, 2Q '18 were at $79 million. And then for 2Q '19 were at $87 million.
Yes, got it. $79.4 million to the $87.1 million?
Yes,
Got it. You're dealing with this -- it's some one-timers. We had a couple of bucks running through there, that are across the place. We expanded some call center staffing, that reflects the fact. We made -- we've made some investments to expand our ability to grow that business, and some of those come in front of that growth. We added some application capability. We've added some agent recruiting and training. We stepped up the growth that occurred inside of that space and was sort of a one-time ripple through related to some agent sales trips. We had the plan in place for how they qualified for the trips for the whole year. We brought online the new capabilities, and you can't change a comp plan and a trip qualifying plan in the middle of the year, that's not a good thing to do with the distribution population. So they got the benefit of the new capabilities with benchmarks that were set with the old capabilities, because those costs are not associated with an individual policy, they are associated with everything they wrote over the entire year, you can't DAC those. They wind up and could be expense in the current period.
We won't set up that plan to run that same way, now that the new capabilities are there. We deployed some one-time changes in some of the actuarial consulting resources we were using for the firm and we brought them online and that's running through the time period. So I mean, it's a series of smaller items, that taken together, it would become a not insignificant dollar item, and candidly, we could have spread them out overtime a little bit, so it didn't pop. We actually thought that the right answer was to make the investments and move those items at the appropriate timeliness to see the benefits as briskly as we could.
Okay and then -- sorry, I don't mean to beat it to death, but again, there's pretty good variation this quarter on that business. So historically, we've always thought of this business as more of a steady state business that of course, it can bounce around a little quarter, but going forward, should we be thinking of it as a steady-state business or is this one that quarter in quarter out, you can have decent swings in the numbers?
No, I would think about it, Adam, as a fairly steady state business, with somewhere along, you're going to get one quarter effectively, that has a little less frequency than you're expecting, and one quarter where you are generally going to have a little bit more. For the total of the year, no change, in terms of what your overall expectations are. When you're going through, as I mentioned earlier too, when you kind of think through, the expenses in that, on a sum total you had just under $5 million that was related to volume items. Again those are expenses coming out, it will be -- we'll get the benefits essentially over many years, right, but that expense is upfront and different from where we are at.
You had investments that were close to $5 million inside the quarter right, but again, those are expenses that have been incurred, but the positive benefit of that is going to be for many, many years. Average life of the policy, 17 years right that's coming in. But again, expense upfront -- on that front. And then again, some of those other one-time expenses that Joe was alluding to, another $3.5 million inside those types of items, that are coming across, again would not expect those types of items to repeat, but the benefits associated with them do.
And so big picture, I continue to look at the business very much in line with what you've historically seen. We're bullish about the fact that, it's starting to grow a little bit it's not -- it's going to have huge growth, double-digit growth or anything like that, but we're excited about the 3% growth, and we think that the business continues to enhance itself from a competitive position and capability standpoint, that's good for the overall franchise overall. And I wouldn't expect any other changes from a cash flow or volatility perspective/ It's just a little -- a few one-time, things that we're doing now to further enhance the business.
Okay, thanks. Thanks for the answers.
Our next question will come from Christopher Campbell with KBW. Please go ahead. Mr. Campbell, your line is now live.
Yes. Can you hear me?
We can Chris. Go ahead.
All right. Yes. Sorry about that. I had the mute still on. I guess the first question is, how should we think about the organic growth potential in Specialty Personal, Auto and then Commercial Auto?
Well, we are feeling good about the growth we've generated, in both the segments of the Specialty business. We don't give guidance on growth or revenue going forward -- we aren't going to give guidance on earnings either. So the best I can tell you, is, I might think about it, that we've seen a pattern of a fairly strong, fairly consistent growth out of both sections of that business. We've got very attractive combined ratios. I think if you did a little bit of math, you would probably come to the conclusion that if we were targeting or delivering over time, a low-double digit ROE, that those businesses are likely exceeding that target. We've expressed before that we think the best way to build long-term shareholder value, is once we meet that target to grow the business as much as we can. So that would suggest that we're willing to let a little bit of that margin deteriorate, to make sure that growth continues.
And then it becomes a bet that any one of us can have on whether the market conditions continue where they are, what happens to frequency and severity, and whether or not we can still squeeze out some more capability improvement, from what we're doing and bringing these two companies together. But I think the net is, we're in a pretty strong position now. It would be hard to imagine those conditions could change in a single quarter or two.
Got it. And then -- I'm sorry, go ahead. Joe.
I'm sorry…
I tried not to give you guidance, but I think I generally pointed you in some ways to think about it.
Okay, great. No, I appreciate that. And then, so -- but if you're thinking about those two lines, I mean just -- more the Personal Auto side. Rates are coming down fairly dramatically, in some of your states like California, etc. So how should we think about, like just your willingness to grow in a softening market?
Well, I don't think we're seeing rates come down in the Specialty Auto, that's what I was answering. Were you asking about preferred?
Well -- I'm thinking. Yes, well, I mean, like of what I'm thinking about is, if you look like the top 10 auto writers like by state. You look at California, it might have been like 9% in 2017, and that's come down over time. So I guess it would be more bias towards the Preferred side.
Yes. We very much. Think of these as two separate markets. They roll up through the same stat line, and they're very different markets. And when we look inside of our specialties, what's going on in California is very different than what's going on in Florida. So we're specialists, and we look at each one of those individually. So the market condition of pulling the statewide data for auto, in total, is going to not be a great picture of what we're seeing at street level, in terms of what we're going after. So I think the premise is off a little bit.
The way I might describe it to you Chris is, if you think about book value creation and the shareholder value accretion over time, we would suggest that if two companies started out, both at a 96% combined or a 93% combined, and one tried to maintain that margin in the other said you know I'm willing to let it creep up a little bit, to something like a 95%, or 96% or 97%, which might generate that low double digit ROE and grow. And the other said, I'm going to try to just preserve that margin and I'm willing to sacrifice the growth. My sense is, you would -- the shareholder, have much better shareholder returns from the one that was growing the book of business at appropriate margins, but not trying to maintain exceptionally strong ones, than you would have in the group to try to just purely maintain the margin.
And I think if you back up 20-25 years ago, you could find one or two, examples of each of those investment thesis and how they were executed in the market by stock companies focused on Personal Lines and it'd be pretty obvious which one you would have wanted to pick in that process, which one grew shareholder value more. So we're focused on generating that long-term shareholder growth, which is hitting the appropriate returns, and growing as much as we can. So if our choice was to trade two points of combined ratio now, for four or five points of growth, we would.
Okay, great. And then are you noticing -- I mean, are there any like hot spots in terms of states? I think one of your competitors had pointed out like Georgia, like especially around the Atlanta area, and I know that was like something that Infinity was working on like -- that and then Florida, were kind of hotspots for that competitor. Are you seeing any uptick in loss costs in those markets or any other ones?
Not in particular, no, especially on the two that you mentioned. On the Georgia side, that is an area that we're -- the Infinity Yang is focused on, and we're still small, but growing. In Florida we've again -- we're a bigger player there and we continue to watch for anything -- early signs of something that might cause a little bit of pressure. As I mentioned, I think in an earlier question around, I think the severity question on the BI, and I mentioned that we got -- we got a little bit of pressure in the BI side on California, but outside of that, we're not -- we're not seeing anything material.
Got it. And you're not seeing any like pickup in litigation in Auto? Like I know that they recently passed some laws, like trying to plug up some of like the Homeowners abuse, like and fraud that happens there. And I was just curious if by plugging that up, any of that might spillover into auto? Like maybe that's like the next thing that the plaintiffs' bar want to attack down there?
I mean, it will be interesting to see what the future holds. But at this point, we're certainly not seeing anything run over.
Okay, great. Well thanks for all the answers. Best of luck in the third quarter.
Thank you.
[Operator Instructions]. At this time, there are no further questions in the question queue, and this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Joe Lacher, for any closing remarks.
Thank you very much, operator, and thanks to everyone for your time today and all your questions and your interest in Kemper. We look forward to updating you again next quarter. Have a good day.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.