Kemper (KMPR) Q3 2026 Earnings Call Transcript

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DATE

Tuesday, Nov. 10, 2026

CALL PARTICIPANTS

• Vice President of Corporate Development and Investor Relations - Michael Marinaccio
• President and Chief Executive Officer - Stephen McAnena
• Executive Vice President and Chief Financial Officer - Bradley Camden
• Executive Vice President and Chief Distribution and Marketing Officer - Chris Flint
• Executive Vice President and Head of P&C - Eric Kappler
• Executive Vice President and Head of Life - Jennifer Kopps-Wagner
• Executive Vice President and Chief Investment Officer - John Boschelli

TAKEAWAYS

• Net Income -- $52.4 million, or $0.88 per diluted share, representing an improvement from a net loss of $21 million in the prior year quarter.
• Adjusted Net Operating Income -- $59.9 million, or $1.01 per diluted share, reflecting improved underwriting performance in Personal Auto and consistent Life segment contributions.
• Specialty Property & Casualty Combined Ratio -- 99.2%, a 4.8 percentage point sequential improvement aided by $23 million of favorable prior year reserve development.
• Specialty Property & Casualty Underlying Combined Ratio -- 101.7%, down from 102.3% in the second quarter due to the impact of rate and non-rate actions.
• Personal Auto Earned Premiums -- $600 million, a 7% sequential decline as management prioritized underwriting margins over policy volume.
• Personal Auto Policies in Force -- 835,000 policies, representing a 10% decrease during the quarter as the company implemented stricter underwriting standards.
• California Personal Auto Underlying Combined Ratio -- 102.1%, representing a 5.2 percentage point sequential improvement following significant rate actions.
• California Bodily Injury Rate Increases -- 50% cumulative approvals since early 2025, addressing margin pressure from increased financial responsibility limits.
• Commercial Auto Earned Premiums -- $258 million, an increase of 3.6% from the second quarter of 2026.
• Commercial Auto Underlying Combined Ratio -- 97.8%, a 4.1 percentage point sequential increase driven by elevated loss costs in bodily injury.
• Life Segment Adjusted Net Operating Income -- $20 million, compared to $18 million in the previous quarter, providing stable earnings diversification.
• Life Insurance Annual Premium -- Issued premium per policy increased more than 6% year over year, reflecting disciplined pricing and underwriting.
• Restructuring Run Rate Savings -- $90 million annualized, implemented to maintain efficiency despite declining premium volumes.
• Parent Company Liquidity -- $727 million, including $91 million of cash and investments and $636 million of available borrowing capacity.
• Risk-Based Capital Ratios -- 625% for Life and 230% for P&C subsidiaries, which management categorized as being well capitalized.
• Debt-to-Capital Ratio -- 28%, which remains flat sequentially after being impacted by a prior goodwill impairment.
• Investment Portfolio Yield -- 4.8% core portfolio book yield, with average investment-grade new money yields at approximately 5.9%.
• Florida Excess Profit Liability -- $10 million increase during the quarter, which added 1.7 percentage points to the Personal Auto underlying combined ratio.
• Geographic Diversification -- 28% of personal auto policies are now located in Florida and Texas, up 5.5 percentage points since the first quarter.
• Investment Portfolio Composition -- $8.3 billion total, including $6.3 billion in fixed maturities with 69% rated A or higher.

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RISKS

• CFO Camden warned that commercial auto margins narrowed as the underlying combined ratio increased 4.1 points due to "elevated loss costs, primarily in bodily injury."
• CEO McAnena stated, "We acted decisively, and we expected premium and policy counts to decline and they did," noting the trade-off required to restore segment profitability.

SUMMARY

Kemper Corporation (NYSE:KMPR) reported improved sequential underwriting results as rate increases in California and other key markets began earning into the portfolio. Management stated the company is prioritizing profitability and margin restoration over policy growth, leading to an expected decline in policies in force. The company consolidated its distribution and marketing capabilities under a unified leadership team to coordinate lead generation and digital sales across product lines. Management reported that geographic diversification is a priority, with Florida and Texas representing a growing share of the personal auto book to reduce concentration in California.

• Management formed a new distribution and marketing organization in Sept. 2026 to integrate marketing analytics and lead generation across all product lines.
• CEO McAnena stated, "Our focus turns to stabilizing production and returning to growth at a pace our profitability justifies."
• The company launched a new auto insurance product in four states—Arizona, Oregon, Florida, and Texas—featuring sophisticated pricing segmentation.
• CFO Camden indicated that the company aims to reduce the debt-to-capital ratio from 28% toward the low 20s as it returns to profitability.
• Head of P&C Kappler noted that competitors in California are trailing the company's rate actions, stating, "At most, they've gotten one approved. Some of them have gotten none approved."
• Management is running structured tests across lead generation and fulfillment to identify scalable tactics for durable growth.
• The Specialty P&C segment reported $23 million of favorable prior year reserve development, which improved the reported combined ratio.

INDUSTRY GLOSSARY

• Combined Ratio: A measure of profitability used by insurance companies to indicate how well they are performing in their daily operations.
• Underlying Combined Ratio: A financial measure that excludes the impact of catastrophe losses and prior year reserve development to show current-period performance.
• PIF (Policies in Force): The total number of insurance policies that are currently active and for which premiums are being paid.
• RBC (Risk-Based Capital) Ratio: A method of measuring the minimum amount of capital appropriate for a reporting entity to support its overall business operations.
• LAE (Loss Adjustment Expenses): The costs associated with investigating and settling insurance claims.
• Non-rate actions: Profitability initiatives that do not involve changing the base premium, such as tightening underwriting guidelines or verifying customer data.
• Bodily Injury (BI): A type of insurance coverage that pays for injuries the policyholder causes to another person.

Full Conference Call Transcript

Operator: Good morning, ladies and gentlemen, and welcome to Kemper's Third Quarter 2026 Earnings Conference Call. My name is Jen, and I will be your coordinator today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I would now like to introduce your host for today's conference call, Michael Marinaccio, Kemper's Vice President of Corporate Development and Investor Relations. Mr. Marinaccio, you may begin.

Michael Marinaccio: Thank you. Good morning, everyone, and welcome to Kemper's discussion of our third quarter 2026 results. This morning, you'll hear from Steve McAnena, Kemper's President and CEO; and Brad Camden, Kemper's Executive Vice President and Chief Financial Officer. We'll make a few opening remarks to provide context around our third quarter results, followed by a Q&A session. During the interactive portion of the call, our presenters will be joined by John Boschelli, Kemper's Executive Vice President and Chief Investment Officer; Chris Flint, Kemper's Executive Vice President and Chief Distribution and Marketing Officer; Eric Kappler, Kemper's Executive Vice President and Head of P&C; and Jennifer Kopps-Wagner, Kemper's Executive Vice President and Head of Life.

After the markets closed yesterday, we issued our earnings release, filed our Form 10-Q with the SEC and published our earnings presentation and financial supplement. You can find these documents in the Investors section of our website, kemper.com. Our discussion today may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, the company's outlook on its future results of operation and financial condition. Our actual future results and financial condition may differ materially from these statements. For information on additional risks that may impact these forward-looking statements, please refer to our 2025 Form 10-K and our third quarter earnings release.

This morning's discussion also includes non-GAAP financial measures we believe are meaningful to investors. In our financial supplement, earnings presentation and earnings release, we 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 in the Investors section of our website, kemper.com. All comparative references will be to the corresponding 2025 period unless otherwise stated. I'll now turn the call over to Steve.

Stephen McAnena: Thanks, Michael. Good morning, everyone, and thank you for joining us. As I noted in our second quarter earnings call, we're taking actions to strengthen execution and accountability. Today, I can report that those actions are taking hold. The progress we made in the second quarter continued and our operating results improved. Two disciplines are behind these results: relentlessly reviewing our data and acting with urgency. Over the past 5 months, I spent much of my time with our employees, agents and business partners. They told me what makes Kemper special: talented people, deep relationships and a drive to serve customers the broader market often overlooks. They were just as clear about what needs to change, and we listened.

Their input, along with my own assessment, informs 3 immediate priorities: restoring profitability, positioning Kemper for durable growth and strengthening our leadership team. Together, they give us a clear path forward, a path I believe in. We'll take them one at a time, beginning with profitability because it's foundational to everything we do. Let's start with personal auto. Our rate and non-rate actions have improved the underlying combined ratio by nearly 8 points since the first quarter. That's real progress. And while we're pleased with these gains, we're not yet earning an underwriting profit, and we won't be satisfied until we do. California, our largest market, is a big part of that story.

Those same steps reduced California's underlying combined ratio by more than 7 points since the first quarter. But all of this came with a trade-off, and I want to be direct about it. We acted decisively, and we expected premium and policy counts to decline and they did. It wasn't an easy call, but it was the right one. And as margins improve, our focus turns to stabilizing production and returning to growth at a pace our profitability justifies. Turning to commercial auto. Last quarter, we said we'd put margins ahead of volume, take more rate and tighten our underwriting. Since then, margins have narrowed, underscoring the need for those actions and new business growth has slowed as we expected.

We'll stay the course and accept modest growth as we work back toward our targets. Beyond auto, Kemper Life continues to deliver dependable earnings, steady cash flow and valuable diversification. Together with our high-quality investment portfolio, it gives us a solid foundation while we improve P&C results. Restoring profitability is where we start, not where we stop. With every point of margin, we earn more of the right to grow. And that brings me to our second priority, positioning Kemper for durable growth, a kind that's profitable and built to last. We're pursuing that growth through our newly formed distribution marketing organization led by Chris Flint.

We created this structure in September with a simple objective, reach more customers more productively across multiple channels at a lower cost. Many consumers value personal guidance and service, and we intend to deepen those relationships, not replace them. At the same time, people want flexibility in how they engage. Our job is to make connecting with us seamless wherever and whenever they choose. Doing that effectively requires one team that coordinates tactics across every channel. Over the next several months, we'll run structured tests across lead generation, lead management and lead fulfillment to learn what drives results. We'll judge every tactic on performance, we'll scale what works and we'll stop what doesn't.

In time, this will become the groundwork for future growth. Strategy sets direction, but people and culture deliver the results, which brings me to our third priority, leadership. We need leaders who are highly accountable, make timely decisions and work as one company, not in silos. That's the leadership team and culture we're building at Kemper. We've added experience and depth to the team across P&C, life, claims and distribution. We're also simplifying how decisions get made and how work gets done. You won't find those changes on an income statement, but you'll see them in how quickly we move and how consistently we execute. Before I close, I want to recognize our commitment to the communities we serve.

Through the Kemper Foundation, our philanthropic arm, we sponsor Read Conmigo, a program that puts resources directly into the hands of teachers and schools to enable dual language education. It helps children build the skills and confidence they need to succeed. We bring that same spirit to our customers every day, helping people protect what matters and supporting them through some of life's toughest moments. So let me close where I began. Our actions are taking hold. We're restoring profitability with discipline, building the capabilities for durable growth and leading with the team that owns the outcome. We're encouraged by our progress, but we're not declaring victory.

There's much work ahead, and I have every confidence in this organization as we move Kemper forward. Thank you. With that, I'll turn the call over to Brad for a closer look at our financial results.

Bradley Camden: Thank you, and good morning, everyone. As Steve shared, we had a strong quarter, but we have more work to do. Net income was $52.4 million or $0.88 per diluted share and adjusted consolidated net operating income was $59.9 million or $1.01 per diluted share. Our financial results reflect continued progress in underwriting performance and consistent contributions from Life and investments. I'll begin my comments with our operating businesses, followed by expense efficiency, capital and investments. Specialty P&C reported a combined ratio of 99.2%, down 4.8 points sequentially. Reported results benefited from $23 million of favorable prior year reserve development. The underlying combined ratio also improved to 101.7% from 102.3%.

The improvement in Specialty P&C was driven largely by personal auto, where we're beginning to see the cumulative benefits of our rate and non-rate actions. The reported combined ratio improved to 99.3% compared with 105% last quarter, while the underlying combined ratio improved another 2.2 points to 103.3%. The biggest improvement in the book has been in our largest state, California. Its underlying combined ratio improved 5.2 points sequentially to 102.1%. Since the beginning of 2025, we've received approval for cumulative rate increases of approximately 13% in California personal auto, including approximately 50% in the bodily injury coverage. Bodily injury has been our greatest source of margin pressure following last year's increase in the financial responsibility limits.

These rate increases, together with our rate and non-rate actions, are contributing to improved results. We expect additional benefits as the more recent increases earn into the book. As Steve mentioned, our actions to restore profitability came with an expected trade-off, lower production. Personal auto earned premiums were $600 million, down 7% sequentially, while policies in force declined approximately 10% during the quarter. While restoring profitability remains our top priority, geographic diversification is also important to the long-term performance of personal auto. We believe a more balanced portfolio that reduces concentration risk will support more consistent underwriting results and profitable growth over time.

As we expand in other markets, we expect California to represent a smaller percentage of our personal auto portfolio over time. We're making progress toward that objective. California now represents 63% of policies compared with 67% earlier this year. Florida and Texas, our second and third largest markets, now account for 28% of personal auto policies, an increase of 5.5 percentage points since the first quarter. Together, they represent approximately 79% of new business direct written premium. Moving to commercial auto. Our decision to moderate production is reflected in slower policy growth this quarter. Policies in force increased 0.7%, while earned premiums increased 3.6% sequentially to $258 million.

The business continues to generate an underwriting profit on an underlying basis, although margins have narrowed. The reported combined ratio was 99% compared with 101.2% last quarter. The underlying combined ratio increased 4.1 points sequentially to 97.8%, reflecting elevated loss costs, primarily in bodily injury. We've taken additional pricing and underwriting actions to address these trends. We'll continue to moderate PIF growth until we're confident that earned pricing is outpacing loss trends and that margins are on a sustainable path toward our long-term targets. Turning to Life. We continue to see consistent earnings from this business. Adjusted net operating income was $20 million this quarter compared with $18 million last quarter and $19 million a year ago.

Normalized revenues increased modestly to $153 million compared with $152 million last quarter and $148 million a year ago. Average annual premium issued per policy increased more than 6% year-over-year, reflecting our disciplined approach to pricing and underwriting. Beyond the performance of our operating businesses, expense management remains an important priority. Since launching our restructuring effort in 2025, we have implemented actions generating approximately $90 million in annualized run rate savings. These efforts have helped us maintain a healthy expense ratio despite declining premium volumes. We continue to identify opportunities to simplify operations and improve efficiency. As production stabilizes and returns to growth, we expect to benefit from greater scale and continued expense discipline, supporting stronger operating leverage.

Moving to our balance sheet. Our capital and liquidity position remains strong. Parent company liquidity was $727 million at quarter end, including $91 million of cash and investments and $636 million of available borrowing capacity. Debt to capital was 28%, essentially unchanged from last quarter. Our insurance subsidiaries remain well capitalized with estimated risk-based capital ratios of 625% for life and 230% for P&C. Together, holding company liquidity and subsidiary capital provide financial flexibility to support our businesses as we execute our profitability initiatives. Turning to our investment portfolio. It remains an important source of earnings, supported by its size, diversification and credit quality.

The portfolio totaled approximately $8.3 billion, including $6.3 billion in fixed maturities, of which 69% were rated A or higher. Net investment income was $107 million compared with $105 million in the second quarter. Pretax equivalent annualized book yield on our core portfolio was 4.8% compared with average investment-grade new money yields of approximately 5.9%. With new money yields above our existing portfolio yield, we see an opportunity to boost investment income as cash flows are reinvested depending on portfolio turnover and market conditions. Overall, we're encouraged by the financial progress this quarter. We're focused on further improving underwriting profitability, building capabilities for durable growth and maintaining financial strength. With that, operator, we'd be happy to take questions.

Operator: [Operator Instructions] Your first question comes from the line of Gregory Peters with Raymond James.

Charles Peters: So I'll focus for the first question on the California personal auto business. And I guess it's one question in 2 parts. But given the decline in PIF that corresponds in the improvement in profitability, just wondering where you think the PIF numbers might settle out over the next year or 2? And maybe you could just throw in the commentary on the insurance -- the new insurance commissioner and any perspectives you have on the ability to get further rate increases in California.

Stephen McAnena: Greg, this is Steve. Thanks for the question. I'll take the sort of the first one, the second part first, the commissioner, and then I'll respond to your question about PIF and give you a little context as to how we're thinking about California and maybe ask Brad and Eric to chime in afterwards with any color they may want to add. So if I pull back, the reality is every couple of years, there are new Department of Insurance administrations. From our perspective, if you go back in time and look at where we are currently, we've had pretty strong relations with our departments of insurance, and we work really hard at that.

And we would expect that to continue. And that's both at the top and throughout the organization. Second, with any new administration oftentimes comes change. And I'd say, from our perspective, we have good teams in place to sort of look at what's on the docket, what it means for us and then build strategies to both comply with any changes, but also navigate in that new environment. So we feel pretty good about how we navigate any changes in the insurance department and frankly, look forward to in California, working with Commissioner Kim.

So California, I'm going to give you a little context as to how we're thinking about things and then hand it over, like I said, to Brad and Eric. If you just sort of pull back and look at the state, I think at our peak in Q1, our combined ratio underlying was around 109. We're down to 102. That's not by accident. That's very deliberate as a result of the actions we took, rate and non-rate. And we feel pretty good about that improvement. Our expectation is, and the team will talk about this in a little more depth, that we'll continue to earn in the benefits associated from all the rate and non-rate actions into '27.

At the same time, as you pointed out, it was intentional. We have allowed PIF to decline. Frankly, if you ask why what happened, the punchline there is we got ahead of the market. So we saw what happened in 2025. We took action, and we continue to sort of punch away at rate that we need. You're starting to see other carriers do the same. So if you look at the CDI website, you'll see a bunch of filings with quite significant increases. And so we feel like we're doing the right things. We're okay with the trade-off that we made. I can't give you an exact quarter when profit -- because when profit will be restored.

We feel good about the momentum and the trajectory we're on into 2027. Our plans and our view is to make sure we have good line of sight to profitability. And as we start to see that and feel comfortable, we put together a couple of good quarters, we will then start marching towards PIF stabilization, which oftentimes lags profit restoration by a couple of quarters. And so you can kind of think about 2027, making some progress to sort of drop below 100 and then a couple of quarters after that, PIF stabilization. So hopefully, that gives you a flavor for how we thought about it.

I'll hand it to Eric to maybe provide a little more color on some of the things we're doing in California and add any comments that I made.

Eric Kappler: Yes. Thanks, Steve. And Greg, I'll just kind of reinforce what Steve said. So we do think we recognize the loss trends earlier than the market generally and reacted quickly. To Brad's prepared comments, we've had 4 filings approved to date. We think we're very close on getting a fifth filing approved. The competitors are behind us. At most, they've gotten one approved. Some of them have gotten none approved. So we think the market will catch up with us over the next year or so as those filings get approved.

Bradley Camden: Sorry, Greg, I was going to add to Eric's comments. As Steve was mentioning about PIF growth, you asked the question on, hey, when is that going to stabilize? Steve indicated, it's dependent on a lot of different factors. I would just highlight from Eric's comments, as the market takes rate and it gets approved, our rates will become more competitive and our growth will begin to stabilize. But first and foremost, as Steve indicated, we're focused on restoring profitability. Once that's restored, PIF will stabilize and then we will eventually grow. So time dependent, but we're taking all the right actions, and we like what we're seeing.

Charles Peters: My follow-up question, I know you referenced bringing Chris on board to help with distribution and marketing and if I look at your presentation slides, you did spend one of the slides focusing on distribution. Can you -- in the last several months, there's been the emergence of more AI-related distribution alternatives. News came out, as you know. I'm just curious, when I look at the slide on distribution, how you're thinking about it looking forward, especially in an environment where AI becomes more prevalent.

Stephen McAnena: Great question. And I'll -- this is Steve again. I'll start off and hand it over to Chris. And I think it's important to give you a little bit of context as to how I've been thinking, and I think the team would agree with me. As we continue to restore profitability, we looked ahead and said, I think a good analogy is the car and the driveway in February in Chicago. The engine is cold, you want to warm it up. We really want to do things now on the distribution side to position us to be able to grow the right way on the other side of this profit speed bump.

I'd say contextually important to understand where we're coming from before getting into an agenda. We're primarily an agent-based organization, and that's great. The challenge with that is consumers, as you know, want to interact with you whenever, wherever they want. So from my perspective, as I look at the organization, we have very good people, but I would characterize the resources as being somewhat fragmented across different teams. So we really wanted to bring them together under one unified team. Chris' goals are pretty simple. And I kind of bucket them into 3 areas. One is taking our core capabilities and making them bigger, better, stronger.

In plain English, looking at our agency channel and saying, what are the things we can do to have more agents and make them more productive. So really investing in tools, incentives and reevaluating our engagement model with them. So that's one important thing. And I think in the near term, as we sort of move forward, that pillar will have the biggest benefit. There's a second pillar, which is what are some capabilities that we need to build that we absolutely know we need to build. And for me, there's a couple. We need to build lead generation capabilities, so capabilities to drive people to Kemper. And then we need to have the channels to receive them.

So think of digital and inside sales, and we have an opportunity in those 2 areas. And so Chris is really focused primarily on making our existing channels better and then building new capabilities. There's a third pillar, which is -- gets to your question on AI -- and that's really taking new ideas and doing what I would call constructive tests and learns. I think every company is in a different -- at a different level of maturity in terms of their distribution capabilities and AI experiences, number one. Number two, everyone has different priorities.

Our priority right now is focusing on profitability, making sure that Chris has all the resources he needs to deliver what he needs to strengthen and build. And then we will march towards some tests on the agentic side. We do have plans to do some very simple tests to get some learnings, but I don't want to sort of undersell sort of the challenge associated with that, number one. Number two, we need to make sure that we don't let that distract us from delivering capabilities we need to strengthen and build. Chris, if there's anything you'd like to add in terms of what I said, please feel free to jump in.

Christopher Flint: Sure. I think Steve did a nice job sort of covering things. I just want to reinforce that anything that we do, our growth is really gated by 2 things: disciplined and profitable growth and making sure that we show up wherever and whenever our customers want. And if I just think about where we are, as Steve mentioned, really strengthening and building core capabilities of the organization. And for me, that means a few things, really bringing together common capabilities across the organization. So think marketing analytics, lead generation, sales enablement while also maintaining sort of the unique distinct distribution capabilities we have by product line.

Specifically, when I think about our agentic in general from a distribution and marketing perspective. For us, for me, the team, the bigger opportunity is really how AI is changing the way customers discover, evaluate and purchase insurance. And as Steve mentioned, we're going to continue to test and learn in small cycles so that we can be sure that at the right time, we're positioned to compete in an evolving environment.

Operator: Your next question comes from the line of Paul Newsome with Piper Sandler.

Jon Paul Newsome: I wanted to ask about the outlook for the profitability for the auto business outside of California. Rough numbers, it looks like the underlying combined ratio there is above 100 if I kind of do the math with what you gave us in the California book. Is that the case? And how should we think about profitability improvements, just the profitability of the business outside of California? I think you're trying to grow that area, right? So that's the area where you hope your profitability improvements will come from. Some thoughts there would be great.

Stephen McAnena: Paul, this is Steve. Great observation and terrific question. So -- outside of California, our biggest state is Florida. So I'll just, for simplicity, limit my remarks to Florida. When you look at our performance, particularly in the third quarter of '26, there's a couple of things going on with the combined ratio. One, we have some rate decreases earning in as a result of the tort reform in the state. Two, we have a little bit of impact associated with growth. And then three, there's a little bit of noise, and we think it's noise. There's a fourth item, which is very important. It's technical, and I'll hand it over to Brad.

But what I'd say is there's what we report on a quarterly basis, and then there's how we think about managing the states in totality. So when we look at whether it's Florida or Texas or any of the markets we're in, we'll look at quarters, and we don't claim success for a good one nor failure for a bad one. We tend to look at results over a 1- to 2-year period and forecast them forward to really understand what we should expect into the out years. As we look at Florida as an example, we feel like when we look at our aggregate performance, our current rate level, we feel pretty good about the outlook for the state.

I'll ask Eric after Brad to chime in with some things we're doing in Florida. But the punchline is a little bit of noise, a little bit of growth, impact of earned rate decreases coming in, feel good about the profit outlook for the state. But there is a technical issue associated with excess profits that I want to make sure that you understand. I'll have Brad speak to that, and then we'll ask Eric to comment on some things we're doing in Florida.

Bradley Camden: Paul, great question, great observation. With respect to the technical components, let me provide some context on 3 metrics. Steve mentioned excess profits. In the third quarter of '26, we had a Florida excess profit liability increase of $10 million. That results in a reduction of earned premium, which then impacts the combined ratio in a negative direction. So when you look at the P&C segment in total, we reported a 101.7% underlying combined ratio. If you adjust that for the Florida excess profits, that would actually be 100.5%. If you look specifically at the personal auto business, we reported an underlying combined ratio of 103.3%. If you adjust for the Florida excess profit, that will be 1.7 points.

But more importantly, to get to your question, how does that impact the states outside of California, and they had a much greater impact, particularly in Florida, Texas, where it had an impact of roughly 7.2 points. And so what you're seeing when you look at the results is a significant impact from the Florida excess profits this quarter. As Steve mentioned, we like what we're seeing in Florida. We've decreased our rates. We're growing at our permissible loss ratios, and we like what we see over a period of time. But this quarter results, particularly outside of California, were impacted by the Florida excess profits from an underlying combined ratio perspective.

And let me pass it over to Eric, and he'll talk more about what's going on in the state.

Eric Kappler: Thanks, Brad. So Paul, we're seeing Florida being a hypercompetitive market right now. We're seeing competitors decrease rates, do things like run sales incentives, paying for cash wraps, things like that. We think we've reacted all the way to the lower indemnity costs following the tort reform, and we're kind of more at a normal place now in our cycle, and we're starting to take what I would characterize as normal inflationary rate. We took a 5% rate increase last week on our new business program there. So we're being disciplined. And while the market remains hypercompetitive, we're watching losses closely and being proactive in taking the rate we need to keep up with profitability.

Jon Paul Newsome: A quick follow-up. How long does the impact from the Florida excess profit work its way through the system? Is it gone in a year or next quarter? Or just maybe some thoughts there. And then I have a broader question on capital I wanted to ask.

Bradley Camden: Sure, Paul. This is Brad. Last week, we announced a rebate to Florida policyholders that were eligible of $46.2 million, and that was for accident years '23 through '25. They had no impact on our third quarter financial results that was previously recorded as a liability. For the current open period, which is accident years '24 through '26, that ends at the end of the first quarter of 2027, we have established a liability of $29 million. This is our best estimate of what we think we'll have to rebate for this period. We annualize this each quarter.

And based upon the development, particularly after the reforms and certain coverages, Florida losses have been developing very favorably during this time frame, particularly in 2024. But as of right now, for those 2 measurement periods, '23 through '25 and 2024 through 2026, we have accrued to $75 million of a liability, and this is our current best estimate of what we think we'll have to refund over these time periods.

Jon Paul Newsome: That's super helpful. I have to think about it a little bit, but yes, that's great. I wanted to maybe step back a little bit and ask about the capital management process. And in particular, I was interested in whether or not you're going to be pushing more capital into the property casualty subsidiaries or -- and/or if you're thinking about reducing debt to capital. They're not super out of line, but I'm interested if you think like a 230% RBC ratio is kind of the right level or if that's something you want to build upon? And similarly for the debt to capital, is 28% the right number?

Or do you want to get back to, I guess, the 24%, 25% it was in the more recent periods?

Bradley Camden: Thanks, Paul. Great question. Maybe I'll touch briefly on our capital allocation philosophy and how we move capital within our ecosystem. We try to get capital up to the most fungible entity, which is the holding company. And at the holding company, then we can distribute the capital down to our various legal entities, whether that's on the P&C side or the life side. And so we focus on capital fungibility first. When you look specifically at the P&C subsidiary and our rated entity is Trinity, that represents -- or that has roughly a 230% RBC level. That was within our -- well within our tolerances here in the organization. We're well above regulatory minimums.

We have plenty of capital to operate in that and that legal entity and then that business. If we need more, we can always drop more down there or do what we need. But right now, with what we're seeing from improvement in profitability, a decline of written premiums, my expectation is that RBC ratio will continue to improve as we make profits and the trailing 12-month written premium comes down. But like I said, well within our normal tolerances. With respect to the debt-to-capital ratio, which is roughly 28%, it is high, higher than we'd like it to be, but it was driven by last quarter's goodwill impairment.

And so as we return to profitability and continue to make money, as we address any debt issuances, we have a couple of years out there before we get to maturity. But our goal is to work that down towards the low 20s over time. That said, that will not happen overnight. But in total, we're comfortable with where we stand today, but we know we have more work to do.

Operator: Your next question comes from the line of Brian Meredith with UBS.

Leandro Leite: This is Leandro on behalf of Brian. I wanted to switch gears to the commercial auto business. You noted that the earned pricing has not moved ahead of loss trends and that bodily injury was a primary source of pressure. I noticed that the written premiums has already accelerated this quarter. So probably still some earned premiums to be recognized throughout the following months. But my question is, could you quantify the current gap between the written rate and the loss cost trends? And if the elevated bodily injury severity has changed your view on reserve adequacy for the recent accident years?

Stephen McAnena: This is Steve. Thanks for the question. Let me provide a little context on how we're thinking about commercial auto, and I'll hand it over to the team to attempt to respond to your question. So I joined in June and in the Q2 earnings call, I think I spoke very plainly about my perspective, which was we were growing this business. The underlying performance looked okay, looked good, and we had multiple quarters of prior year development. And we looked and said we have a choice to make, keep on the current path or adopt a more conservative stance. And my view, my decision was adopt a more conservative stance.

And so we -- sometime over the summer, decided we're going to push rate more aggressively. We're going to slow down new business and continue to grow, albeit at a slower pace. And so when we sort of saw the results for this quarter to me, that underscored some of the decisions we have made and frankly, was aligned with what we had expected given some of the trends in performance. I'll hand it over to Brad and Eric to talk in a little more detail. Maybe Eric can talk about some of the business issues and how we're thinking about things from a pricing perspective.

And then I think you had a question on reserving in there, and we'll have Brad speak to reserves.

Eric Kappler: Sure. Thanks, Steve. So a little context on this business. So this is -- this business is really what I would describe as a light local commercial business. So think contractors, landscapers, delivery services, things like that, not your -- what we would think of high severity exposures like long-haul trucking or dirt, sand and gravel. About 43% of the business is in California. Outside of California, we feel very good about our margins and the profit challenge is really coming from California. We just had a 6.9% filing effective in July. So that is just starting to earn in now.

That filing included 15% of rate on bodily injury and even more rate on the higher limits portion of bodily injury. So we expect that as that earns in, that's going to improve the underlying results. And then we turned around and filed another increase in the month of September. So that's pending with the CDI now.

Bradley Camden: And just specifically on the reserving, you've seen over the last year or so us take some prior year reserve development to strengthen our reserve positioning. We've also done that in the current accident year, and that's reflected roughly a 4.1 point underlying combined ratio increase to 97% and change. We're reacting to the trends we're seeing, higher increase in severity in bodily injury and defense containment costs. You're seeing more activity from lawyers, et cetera. And so we're reflecting that in our picks in our reserving. What Eric articulated is we've taken rate. And so we've strengthened our reserves now that rate needs to earn in.

And as that rate earns in, we'll come back down to our long-term targets in the business. As Eric mentioned, we think the business is performing exceptionally well outside of California. The business is growing and making an underwriting profit, and we think it's a very attractive option for the organization. We need to strengthen the reserves a little bit in California and let that rate earn in, and we're very confident where it's headed.

Leandro Leite: My follow-up question would be on the savings. So on the $90 million annualized run rate savings, how much of that was already reflected in the third quarter? And how much incremental benefit should we see throughout the following quarters?

Bradley Camden: Thank you for the question. We've realized $90 million of annualized run rate savings. That is up $10 million from last quarter. So last quarter was $80 million. Our expectation is we'll continue to focus on expense discipline. You'll see incremental savings as we go forward. However, when you look specifically at the expense ratio, there may be some volatility in that. It's a ratio as premium comes up or down based upon our growth, the expense ratio may move up or down a little bit. To give you some indication, every $100 million of earned premium is roughly a 0.3% increase or decrease in our expense ratio.

So we'll continue to be expense disciplined, but we also want to be very cautious around cutting too deeply. We've intentionally done the $90 million, but we're also focused on providing profitable growth and having the capabilities to do profitable growth when it is appropriate. So once we restore profitability, we'll begin to grow, as Steve articulated, and we want to have those capabilities at the forefront to be able to do so.

Operator: Your next question comes from the line of Andrew Kligerman with TD Cowen.

Andrew Kligerman: I'd like to build on some of the earlier questions, starting with personal auto. So policy in force, it's now for the slide, 527,000. If I remember correctly, pre-COVID, it was over $2 million. So I'm trying to get a sense of where that can go. You mentioned that you're aiming for under 100% at some point in '27 on the combined ratio and that PIF would stabilize following that. So I'm kind of wanting to get a sense of when that might go down, how much that might go down? And do you need -- and with that, maybe talk a little bit about -- I think you've had 2 significant 6.9% rate increases.

Will 1/3 be needed going forward as well?

Stephen McAnena: Andrew, this is Steve. So a couple of things, and I wanted to make sure we're all clear on what we're looking at. So if we look at personal auto, all personal auto 3Q of '25 is 1.1 million. We're currently at 835,000. I think you quoted a 527,000 number, which was California. So I wanted to make sure we were all looking at the correct information. At the end of the day, what -- there's a couple of things that need to happen for PIF to stabilize. Number one is we need to make sure we're comfortable that we have profit under control. We feel like -- we're doing the right things.

The results and the benefits are earning in, and we're seeing that in the results. So we feel pretty good. That's going to take a little time. And we'll -- like I said, we'll see how that plays out in 2027. We feel like we have a lot of momentum, and we would expect continued improvements. On the PIF side, there's our decision to reactivate some marketing once we feel good about the profitability. There's another component, which makes it challenging to answer your question, and that component is what are the competitors doing? And up until recently, I would say it didn't appear to be doing a lot. We now see filings in CDI.

They're taking a lot of rate. So as they take rate, they're sort of catching up to us, which sort of improves our competitive position. We're leaning into profit, which means we are going to continue to see a decline in PIF for a little while. The combination of getting the profitability ASAP, coupled with our decision to improve sort of reactivate marketing spend, coupled with the market behaving in a way that's aligned with what we're all seeing in the costs is really going to drive sort of PIF stabilization and then PIF growth. You asked a question about the rate filings. I'll hand it to Eric to go into some detail on that.

Eric Kappler: Yes. Thanks, Steve. Andrew, so yes, we've had the 4 filings approved. We have one more pending with the CDI that we think is getting close to being approved. In addition to the rate, we're taking non-rate actions. So think about things like verification of the data we use in our pricing models and then to what -- to Steve's point, also from a distribution and marketing action standpoint. So between all of those actions, we feel good about the trajectory of California profitability. And to Steve's point, we're really kind of waiting for the market to catch up on with us.

Outside of California, where our focus is on growing the business, we've launched a new auto product in 4 states. So Arizona, Colorado -- sorry, Arizona, Oregon, Florida and Texas. We feel really good about that product. It's the first time we've launched the new auto product in over a decade. We think this has really good sophisticated pricing segmentation. Early results look very good from a pricing segmentation standpoint and from a rate level. So we feel good about that product being a big part of our ability to grow the business outside of California.

Andrew Kligerman: Got it. And then following up on the commercial auto. Eric, you talked about -- I think you were saying that you're about to earn in a rate increase of 5% focused in California, and there's another 6.9% filed. So that probably bodes very well for the 97.8% underlying that you posted. But then PIF, where do you see PIF going with respect to commercial auto with those types of substantial rate increases. Could we see a sharp downturn there?

Stephen McAnena: I'll take the PIF question, and then I'll let Eric talk about the rates, and we'll take the response backwards. We were growing -- and it's a good question. We were growing PIF in the high single-digit range. And we deliberately decided to pull that back to mid- to lower single digits. To me, we'll grow as fast as we can, subject to the constraint of delivering target returns. We have a little ways to go to get to target return. I think your observation is correct. The rate we have, Eric will clarify the numbers that you quoted. But I think you're right about the rate having a positive impact on profitability.

So we have a pretty good growth engine in CV. We feel like we can generate solid single-digit, whether it's mid or high growth numbers, but that's all subject to being able to deliver profitability. So I'll repeat something I said last quarter and something I'm going to continue to repeat. It's profit first then growth. Profit is a prerequisite for growth. Profit earns you the right to grow. So we have to improve profitability a little bit. I think some of the rate that we have in the pipeline is going to help. Eric, maybe you can comment on the rate that we took.

Eric Kappler: Yes. So Andrew, the filing effective in July was for 6.9%. And again, we took more on bodily injury and even more on the high limits portion of bodily injury and have turned around and filed another 6.9% in September. So to your point, we do feel like we'll catch up with loss trends with that rate as it earns through the book. Outside of California, we feel very good about our margins there. And so most of the restrictions on PIF growth are really coming from California actions, and we feel good about those actions are really driving the intended consequences of slowing PIF there.

Generally, we see the market taking quite a bit of rate where loss trends tend to run a little bit higher in commercial auto than personal auto. So we feel good about our overall competitive position in the commercial space.

Andrew Kligerman: Got it. And if I could just sneak one last one in. Eric, I really admired your work at Farmers and Bristol West in the nonstandard area and the performance seemed to be very strong over there. And so now that you've joined Kemper, could you share some thoughts culturally, operationally that are different from Bristol West and whether some really heavy lifting is necessary to get Kemper's nonstandard auto and commercial operations aligned with the good performance that you had at Bristol West?

Eric Kappler: Yes. Thanks, Andrew. Yes, what I would say is coming here, there's -- I've seen a lot of really good things. So first of all, the people, really talented people here dedicated to the business. And the second thing I'd say is we've invested over the last couple of years in the right areas. So we've invested in our underlying tech stack. So we have modern systems to support the business. We've invested in data and analytic capabilities. And a good reflection of that is the new auto product that I mentioned earlier. Big investment, first time we've done it in over a decade.

I would say my lens on it is it's a very sophisticated modern product that we can continue to build and refine on over time. So I feel like we've really invested in the right places in this business, and we're just starting to see the favorable impacts.

Operator: There are no further questions at this time. I will now turn the call back to Michael Marinaccio for closing remarks.

Michael Marinaccio: I want to thank you all for joining us today. We truly appreciate your questions and continued interest and look forward to speaking with you again next quarter. Have a great day.

Operator: This concludes today's call. Thank you for attending. You may now disconnect.

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