Kemper Corporation (NYSE: NYSE:KMPR), a leading insurance provider, reported a strong first quarter in 2024, with net income of $71 million and a notable annualized Return on Equity (ROE) of over 11%. The company's specialty Property and Casualty (P&C) business outperformed targets with an underlying combined ratio of 93.6%, and the life business continued to deliver consistent returns. Kemper's focus on stabilizing its policies in force (PIF) is expected to lead to growth following traditional seasonality patterns, with significant unit growth anticipated in early 2025.
Key Takeaways
- Kemper Corporation reported $71 million in net income and an annualized ROE of over 11%.
- The specialty P&C business achieved a 93.6% underlying combined ratio, better than the 96% target.
- The company is focused on stabilizing policies in force with growth expected to follow traditional patterns.
- Plans are in place to return to a consistent, long-term profitable growth profile by early next year.
- Over $130 million of capital is expected to be released from the preferred business exit in 2024.
- Net investment income for the quarter stood at $100 million, with a 4.3% pre-tax equivalent annualized book yield.
Company Outlook
- Kemper aims for a low double-digit ROE throughout the cycle.
- Targets a 96 combined ratio for its specialty P&C business.
- Anticipates significant unit growth in early 2025.
Bearish Highlights
- The company's alternative investment portfolio saw a decline in returns in Q1.
Bullish Highlights
- New business applications increased over 2.6 times the volume of the fourth quarter.
- The second quarter is expected to see three times the new business applications of the first quarter.
- The life business continues to deliver consistent returns, and the P&C business is improving capital ratios.
Misses
- Full rollout of new business will not occur within the current calendar year but will expand over time.
Q&A Highlights
- Kemper expects to earn an additional 15 points of rate over the year to cover three quarters of the loss trend.
- Distribution of new business is expected to align with historical patterns, with some temporary variations.
- Retention rates remain stable across different business segments.
- The competitive environment varies by state, with California having fewer competitors and Florida and Texas remaining competitive.
- The reciprocal's growth is projected to be a long-term process over several quarters.
Kemper Corporation's first-quarter performance showcased a strong foundation and a clear strategy for future growth. The company's specialty P&C business exceeded expectations, and the life business continues to provide steady returns. With plans to stabilize PIF and return to a traditional growth profile, Kemper is positioning itself for sustained profitability. The company's confidence is further bolstered by the anticipated release of capital from its preferred business exit and the improvement of balance sheet metrics. Although the alternative investment portfolio experienced a dip in returns, the overall outlook for Kemper remains optimistic, with significant unit growth on the horizon.
InvestingPro Insights
Kemper Corporation (NYSE: KMPR) has been navigating a complex market with a mix of challenges and opportunities. The latest data from InvestingPro provides a deeper insight into the company's financial health and future prospects.
InvestingPro Data metrics indicate that Kemper Corporation has a market capitalization of $3.8 billion, reflecting its substantial presence in the insurance industry. Despite a challenging environment, the company has managed to maintain a Price/Book ratio of 1.47 as of the last twelve months ending Q1 2024, which suggests that the market values the company's assets reasonably in relation to its stock price. Additionally, Kemper's commitment to shareholders is evident with a dividend yield of 2.1%, showcasing its ability to return value consistently, especially considering its track record of maintaining dividend payments for 35 consecutive years.
The InvestingPro Tips reveal that analysts have a positive outlook on Kemper's profitability, with net income expected to grow this year and 5 analysts having revised their earnings upwards for the upcoming period. This is particularly noteworthy given that the company was not profitable over the last twelve months. Moreover, the large price uptick of 43.52% over the last six months indicates strong market confidence in Kemper's future performance.
For readers interested in a more comprehensive analysis, there are additional tips available on InvestingPro, including insights on sales projections and profitability forecasts. Use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, where you can access a total of 7 InvestingPro Tips for Kemper Corporation, providing a more detailed picture of the company's financial outlook.
Kemper Corporation's strategic moves and market performance are positioning the company for potential growth, aligning with the optimistic tone of the company's outlook in the article. With a focus on profitability and shareholder value, Kemper is poised to leverage its strengths in the competitive insurance landscape.
Full transcript - Kemper Corp (KMPR) Q1 2024:
Operator: Good afternoon, ladies and gentlemen, and welcome to Kemper's First Quarter 2024 Earnings Conference Call. My name is Ina, and I will be your coordinator today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, 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, operator. Good afternoon, everyone, and welcome to Kemper's discussion of our first quarter 2024 results. This afternoon, you'll hear from Joe Lacher, Kemper's President and Chief Executive Officer; Brad Camden, Kemper's Executive Vice President and Chief Financial Officer; and Matt Hunton, Kemper's Executive Vice President and President of Kemper Auto. We'll make a few opening remarks to provide context around our first quarter results, followed by a Q&A session. During the interactive portion of the call, our presenters will be joined by Chris Flint, Kemper's Executive Vice President and President of Kemper Life; Duane Sanders, Kemper's Executive Vice President and Chief Claims Officer of P&C; and John Boschelli, Kemper's Executive Vice President and Chief Investment Officer. After the markets closed today, 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 and its future results of operation and financial condition. Our actual future results and financial conditions may differ materially from these statements. For information on additional risks that may impact these forward-looking statements, please refer to our 2023 Form 10-K and our first quarter earnings release. This afternoon's discussion also includes non-GAAP financial measures we believe are meaningful to investors. In our financial supplement, earnings presentation and earnings release, we've defined and reconciled all non-GAAP financial measures to GAAP where required in accordance with the SEC rules. You can find each of these documents in the Investors section of our website, kemper.com. Lastly, all comparative references will be to the corresponding 2023 period, unless otherwise stated. I will now turn the call over to Joe.
Joseph Lacher: Thank you, Michael. Good afternoon, everyone, and thanks for joining us today. I'll start by noting that overall, we're pleased with our results and the progress we've made this quarter. We continued to deliver significantly improved profitability in our specialty P&C business, where we're now exceeding target margins while as expected, policies in force continue to decline. We initiated our new business expansion activities and are on track to return to more typical new business rates by midyear. As pricing loss trend and new business levels return to a more normal balance, our underlying competitive advantages are becoming more visible. With our story and results becoming clearer and simpler, we believe the underlying strength and long-term value creation of the franchise will be consistently apparent. Let's move to Page 4 and jump into results. Overall, we delivered $71 million of net income, an annualized ROE of over 11% and a tangible ROE of over 17%. We are once again achieving or exceeding our target returns. Specialty P&C generated a 93.6% underlying combined ratio. That is a 4.6 point improvement sequentially, a 14.4 point improvement year-over-year, and the fourth consecutive quarter of underlying improvement. We're pleased that once again we're exceeding our target combined ratio of 96% in this business. Let me acknowledge that historically, we've only provided a long-term consolidated ROE target and not a specific specialty P&C target combined ratio. We recognize this has caused some confusion and we're fixing that now. Brad's going to comment further on that a little later. Relative to our life business, while demonstrating modest quarterly volatility, we continue to deliver consistent returns. I'll spend more time talking about this later in the call. Shifting to specialty P&C production. We're acutely aware that PIF growth, or rather lack thereof, is the most significant issue on investors' minds at the moment. We made significant progress in this area during the quarter. While Matt will dig into this in much greater detail, I'm going to hit a few highlights and offer an overriding perspective. Throughout 2023, we committed to a nearly exclusive focus on restoring underwriting profitability, deliberately foregoing new business and potential growth. As we discussed last quarter, we did not rev the new business engine, if you will, until we delivered a sub-100 combined ratio. When it was clear that this had been accomplished with fourth quarter results and we had optimism about the margin outlook, we initiated our new business expansion. This decision was made in late January. There are two key points that will help you interpret our numbers and see why we have confidence in our ability to stabilize PIF quickly. First, since the execution of the new business expansion began in mid-February, only half the quarter realized the benefit. And second, consider the prudent nature of the expansion we're utilizing. We did not turn new business on, similar to flipping on a light switch and going from zero to 100% immediately. We're expanding new business more analogously to driving a stick shift. You don't go from first gear to fifth gear without stalling. The first quarter represented perhaps moving through first and early second year. This resulted in new business apps written growing by nearly 2.6 times the fourth quarter 2023 volume. For the month of April, we wrote about as many new business apps as we did in all of the first quarter. On a run rate basis, this suggests the second quarter approaching roughly three times the first quarter volumes. This might be characterized as the new business engine moving through third and perhaps fourth year. The takeaway, we have confidence that PIF will stabilize midyear, growth will follow subject to traditional seasonality patterns. In the six quarters prior to the pandemic disruption, this business generated unit growth between 6% and 13%. We expect our competitive advantages will allow us to deliver similar results for 2025 and beyond. For a short time, we're going to profile a new, more responsive metric, new business apps to help you measure the speed of PIF stabilization. Matt's going to go through more detail on Slides 9 and 10. As discussed last quarter, the bulk of the strategic initiatives we've been profiling have either been completed or require less frequent updates, given their long-term nature. So there's not much to discuss on those this quarter. I'll leave you with one last thought. We remain committed to delivering an overall low double-digit ROE throughout the cycle. Within our specialty P&C business, we're targeting a 96 combined ratio, and then growing the business as much as possible. We've successfully corrected a major profitability challenge and are now exceeding our target combined ratio. We're addressing declining PIF and expect it to stabilize midyear. We hope you leave today sharing our confidence that we will return to a more traditional, consistent, long-term profitable growth profile by early next year. With that, I'll turn it over to Brad.
Bradley Camden: Thank you, Joe. I'll be on Page 5 with our consolidated financial results. Before reviewing our first quarter results, I want to take a moment to review the metrics we use to evaluate our performance and reaffirm our guidance. If you recall from prior presentations, we strive to deliver a low double-digit return on equity, grow book value per share and generate premium growth in line with the market or higher. These metrics have not changed. For 2024, we've guided to return on equity of 10% or higher, and we are reaffirming this metric. As Joe mentioned for the specialty P&C business, we have not historically provided a target combined ratio. To help simplify our messaging, we are now providing a target combined ratio of 96 for that business. Do not interpret this as guidance, but rather how we will run the business over the long term. Our goal is to achieve our target combined ratio or better and maximize growth. Moving to first quarter results. As Joe highlighted, we delivered a fourth consecutive quarter of underlying business improvement and a second straight quarter of solid operating and underwriting profits. Rate actions and the realized benefits of several completed strategic initiatives such as our cost structure optimization program led to this positive outcome. For the quarter, we had net income of $71.3 million, or $1.10 per diluted share and adjusted consolidated net operating income of $69.7 million, or $1.07 per diluted share. Annualized return on equity was 11.2%, a strong first step towards achieving the 2024 ROE guidance of 10% or better. The specialty P&C's 4.6 point sequential improvement in the underlying combined ratio helped drive improvements in our consolidated results. This business benefited primarily from the earned rate within PPA of approximately 9 points, offset by seasonally normal loss trends. Frequency trended favorably, while severity remained elevated. Moving to the preferred P&C business, which is reported below the line as non-core operations, generated net income of $5 million, including approximately $12 million in current year catastrophe losses. And lastly, specialty P&C adverse prior year development was $5.3 million related to several specific litigation matters. Turning to Page 6. Our insurance companies are well-capitalized and have significant sources of liquidity. At the end of the quarter, parent company liquidity was approximately $1.1 billion, consisting of revolver capacity, intercompany lending capacity and holding company cash and investments. Our healthy liquidity balances allow us to pay holding company dividends and interest payments and support our operating subsidiaries as needed. Our life business continues to be well capitalized and the P&C business continues to improve its capital ratios. Operating profits and the preferred business wind down are helping to improve P&C capital levels. As we previously mentioned, we anticipate over $130 million of capital to be released from the preferred business exit this year. Over $45 million of capital was released in the first quarter. We continue to focus on improving our balance sheet metrics and reducing our debt to capital ratio. As we mentioned, in late 2022, we expect to pay down at least $150 million of debt when we addressed our $450 million February 2025 debt maturity to help reduce our leverage ratio. Moving to Page 7. Net investment income for the quarter was $100 million and our pre-tax equivalent annualized book yield was 4.3%. Lower returns on our alternative investment portfolio reduced net investment income from the prior quarter. We continue to maintain a high quality investment portfolio that generates stable income to support our operating businesses and is aligned with our liabilities. I'll now turn the call over to Matt to discuss the specialty P&C business.
Matt Hunton: Thank you, Brad, and good afternoon, everyone. Moving to Page 8 and our specialty P&C business. I'll start with overall comments for both private passenger auto and commercial vehicle. For the segment, we closed the first quarter with an underlying combined ratio of 93.6%, representing a 4.6 point improvement sequentially and a 14.4 point improvement year-over-year. This resulted in an outperformance against our target of 96%. Once again, the cumulative benefit of our profit actions exceeded incremental loss trend. Our PPA business reported a strong underlying combined ratio of 93.5%. We have additional unearned rate, which will remain a tailwind. Our CV business generated an underlying combined ratio of 93.8%. Our specialization and underwriting discipline continue to create value. Turning to production. Our explicit near-term goal is to stabilize PIF levels. There are several factors that will help to support this goal. First, customer and agent demand for our products is strong. Second, policy retention remains stable. And finally, the most impactful opportunity comes from re-expanding our new business availability. In an effort to provide more insight into PIF and new business level changes, we've temporarily added two new slides. The last two years have uncharacteristically dramatic swings in our new business volumes. We believe multiple metrics can be helpful in identifying and evaluating periods of change. Page 9 details policy in force trends. Year-over-year change in PIF is a valuable metric in relatively stable times because it accounts for seasonality. It's a rolling four quarter measure of activity and therefore acts as a trailing indicator. In periods of significant change, it masked the underlying dynamics. Year-over-year PIF decline in the quarter and the fourth quarter of 2023 were effectively constant at approximately 32%. The sequential quarter trend is a more responsive measure of how our policy in force base is evolving. It measures one quarter's activity. As noted, our sequential quarter PIF decline slowed by 3.4 points from 8.9% in the fourth quarter to 5.5% this quarter. On an annualized basis, this represents an improvement from minus 31% to minus 20%. Progress is more clearly visible here. It was driven by our new business expansion. Let's turn to Page 10 for more detail. Here we highlight how new business apps are trending. In this chart, the bar shows new business apps. As Joe highlighted, the re-expansion of new business writings is underway. Apps have increased by greater than 2.6 times our fourth quarter volumes. And in the month of April, new business apps were approximately equal to the total of Q1. On a run rate basis, the second quarter is on pace to be about three times Q1. This trajectory demonstrates the pace of our reopening. The line on the chart represents new business relative to the beginning of quarter PIF or new business rate. As you can see, the first quarter and the run rate of the second quarter are approaching 4Q 2020 levels. This gives us great confidence in stabilizing PIF by midyear. Given seasonally lower activity late in the year, app volumes will likely level off. We don't expect significant sequential unit growth until the early part of 2025. Let's shift gears and bring this back up a level. Our long-term goal is to achieve a 96 or better combined ratio and to maximize growth. We remain confident in our competitive advantages. These advantages position us to effectively navigate the ongoing market environment. Both the profile and loss performance of our new business writings are in line or better than expectations. In conclusion, despite a quarter where PIF continued to decline, we're happy with our overall progress and are confident in achieving PIF stabilization by midyear. I'll now turn the call over to Joe to cover the life business and closing comments.
Joseph Lacher: Thanks, Matt. Turning to our life business on Page 11. Net operating income was $12 million for the first quarter. Mortality was in line with pre-pandemic levels. As expected, the inflationary environment continued to place modest pressure on this business, although overall persistency remained in line with historical trends. New business levels were down slightly compared to the first quarter of last year. Turning to Page 12, in closing, to reiterate our highlights for the quarter, overall profitability improved and exceeded targets, led by the specialty P&C underlying combined ratio of 93.6%. And we delivered our fourth consecutive quarter of underlying business improvement with more rate to earn in over the next few quarters. The new business expansion we initiated midway through the quarter is delivering solid results. We expect to see PIF stabilize midyear, as new business rates continue to ramp up throughout 2024. Lastly, our life business continues to produce stable earnings. While we're pleased with the results for the quarter and our ability to achieve target profitability, we're clearly continuing to focus on stabilizing PIF. Effective execution of our profit improvement actions, combined with the successful completion of several strategic initiatives, has enabled Kemper to weather the storm and come out a stronger company dedicated to delivering on our promises of providing attractive long-term intrinsic growth to our shareholders and value to all our stakeholders. This could not have been accomplished without the strong efforts and dedication of our entire Kemper team. Operator, I'll now turn it back to you to take questions.
Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Gregory Peters from Raymond James. Please go ahead.
Gregory Peters: Good afternoon, everyone. So, thanks for the additional color on new business apps. I was just -- I guess, as I'm looking at the charts and digesting the information you've provided, the quarterly run rate being three times what it was in the first quarter. I'm trying to reconcile that with the fact that you expect PIF to stabilize in the first half. It seems like with that type of production, that we might actually pivot to actually being up in PIF. So maybe you can help me with some of the math there.
Joseph Lacher: Yeah. Sure, Greg. Thanks for the question. And this is Joe. I'll start. And Matt, you jump in too. The issue you get in specialty auto is a relatively significant amount of seasonality relative to new buyers. If you think about the first quarter, it might be -- if you started at that X, the second quarter is probably 25% bigger, the third quarter is a hair smaller, and the fourth quarter is maybe a third or 40% smaller than that first. So there's definitely a surge in the second quarter and a bigger than quarterly average in the first compared to the third and fourth. So what will happen is we will write new business at a greater rate. We will write maybe more of the available new business apps in the marketplace, but it may be about the same amount of new business apps. That's a -- there's a seasonality element. That's one of the reasons we've historically looked at the year-over-year PIF, because you get a rolling four quarters in that process. So it tamps out the seasonality effect. Right now with the change that's going on, you really very much need to look at the sequential PIF and you need to look at the increase of new business apps. What we were trying to give you a comfort with is that as you saw that April annualize, it was up significantly. That maybe to use our analogy, might be late second, early third year. As we continue to move through the gears, we'll have an increasing percentage of the available new business, maybe a comparable -- comparable count number. So that may just wind up holding steady for the fourth quarter. What you're going to see is in the second quarter, direct written premium will be up low double digits. It will be up much higher than that for the second half of the year. You'll see PIF count growing in the first quarter of next year and earned premium growing in the first quarter of next year. So this new business app look should give you a view, particularly as you look at that line on Page 10, not the bars, but the line. You can see that new business relative to the policy in force at the beginning of the year is a very comparable rate to where it had been in late 2020. Premiums are going to be growing next quarter, written premiums, significant written premium growth in the back half of the year and then PIF and earned premium in the first quarter of next year. Does that help?
Gregory Peters: It does. And as you were talking, I was actually looking at the chart that you have on Page 10. Further just clarification or reconciling the different moving pieces. You're running your specialty auto at target margins. You're going to start growing your new business. And typically, there's a -- some sort of new business penalty that's associated with that. So, I guess the first question, any negative surprises inside when you've started opening up the markets again? And two, how should we think about new business penalties, as you open up your marketing and new business spigot?
Matt Hunton: Hey, Greg. This is Matt. I'll take the first part of that question, and flip it to Joe for the second. In terms of the re-expansion of new business, as we mentioned to you guys that we're taking a methodical approach in terms of how we're reopening to ensure that -- we're understanding the market dynamics, the loss dynamics as they come through. As we're priming the pump, so to speak, we're working through normal, as expected, operational efforts, working that through. In terms of profile, in terms of volumes, in terms of loss performance, everything's coming in in line or better than expectation. So nothing to note there. No surprises. Absolutely no surprises. Everything is coming in right in line with what we would have expected to see at this point in time.
Joseph Lacher: Yeah. And the second piece, I'll 100% reiterate with, Matt. Absolutely no negative surprises at all on what we're seeing. The team is very thoughtfully moving through that expansion to protect from that. I think what I might suggest to you, Greg, is the aggregate new business -- the aggregate benefit we got from slowing down new business was maybe 3 points or 4 points on the overall combined ratio. So the aggregate penalty that will come back in on the aggregate combined ratio is probably roughly of the same order over when we get to full new business. So it's not going to happen all this calendar year. It'll happen as that expands. Again, the good news that came off will be the bad news that comes on. We're running at a 93-plus combined ratio right now. We have an additional 15 points of earned rate that we'll earn in over the year against three quarters of a year of loss trend, that's running roughly 7% or 8%. There is absolutely more than enough room inside of the margins we're at right now and that rate to cover that. That reversal, if you will, or the re-adding, the new business penalty is 100% contemplated in what we described as reversing some of those non-rate actions. It's contemplated in the rate we took. It's contemplated in how the earned rate comes in, and it's contemplated with our confidence that we will meet or exceed that 96 combined target over the course of this year and into next year as we do that.
Gregory Peters: Okay. Thank you for that color. I guess just the final question and I'll let others ask is just on geography. Any -- as you're opening up new business, is there any skewing of geography, or does it match what the legacy book is running at on a percentage basis?
Matt Hunton: Yeah. This is Matt, again. As we reopen, I think we talked about it's going to be a little bit lumpy as we turn things back on. And so, there's -- in one state, we may see a production increase that's maybe outside of normal percentage distributions. And then as we get other states up and running, they come back in line. But generally, over the course of the next few quarters, we're expecting distribution to be very similar in terms of what we've seen in our historical patterns. And we'll continue to look for further geographic diversification opportunities as we work. Short term, lumpy, long term, similar patterns to what we've seen in the past.
Gregory Peters: Makes sense. Thank you.
Operator: Thank you. And your next question comes from the line of Paul Newsome from Piper Sandler. Please go ahead.
Paul Newsome: Good evening. Thanks for the call. A little bit -- maybe a little bit of additional focus on retention. Is there any reason why the retention rate would be different or changing, given the change in non-rate actions and the increase in new business as we prospectively go forward? I was a little bit surprised that it's been as stable as it has been, given all the changes in the company over time. Any thoughts there that would be helpful, would be great.
Joseph Lacher: Sure, Paul, and this is Joe. I'll give you a high level overall answer, then I'll double click on it once. Overall, we're seeing a fairly consistent stability in retention. That's how it's performing. That's what we'd expect going forward. Now I'm going to double-click slightly on it. Imagine, if you will, a couple of different segments of the book of business we have. Some parts of this business have a very short-term tenure. They might be somebody trying to get an SR-22. They might run the policy for three months, four months, and then lapse. Some parts of this business tend to have a much longer policy life. It might be two, three, five years. A lot of times people think a non-standard auto is only being stuff that's around for six or eight months. There's parts of our business that stays around longer. As we -- and each of those -- think of those almost as segments. Each segment is running a retention very consistent to what we would have expected for a long -- for the long term. In this environment, when we reduce new business, some of those that churn a little faster as a mix of the total are not in the book, and some of those that hang around a little longer, they're a bigger percentage of the book. So that will change slightly in total, but the segments are operating as exactly as we expect them and very consistent. In hard markets and soft markets, you tend to get slightly different views. In a hard market, you see retentions go up. In a soft market, you see them go down. This is very much a hard market right now. So we're seeing the benefits of the hard market. We're seeing the benefits of the mix change. What we fully expect as we roll forward over the next 18, 24 months is what I would describe as generally consistent, recognizing there's going to be a modest mix, but we're measuring that for you in PIF, not in retention and the benefits of a hard market.
Paul Newsome: A second question, maybe some more on the competitive environment. Your big states are California and Texas. Goosehead was out earlier talking about State Farm being extremely competitive as well as some other mutuals. I realize that's probably more standard business, but I don't know they write everything in the world. California is obviously a unique creature. Maybe you could talk about sort of whether or not there's more -- within the particularly non-standard business, there's more or less competition. And obviously, lots of folks are raising rates, but not everyone's raising rates as much. Just how you are thinking about that as you contemplate the expectations you've laid out tonight?
Matt Hunton: Hey, Paul. This is Matt. Yeah, obviously the texture there varies quite a bit by state. Think about our -- one of our larger markets, California. As companies are getting more rate adequate there and taking a little bit longer potentially, we're seeing fewer competitor dynamics in that marketplace, especially the larger players, a little bit less supply than what we normally would have seen in that market, creating more hard market opportunity. That said, as the carriers are getting their rates approved and adequacy is coming back in line, we expect that market to continue to get more competitive over the outlook. Florida, which is a big state for us, and Texas, which is a large state, but to a lesser degree, they've been relatively competitive over the last few quarters as the carriers there are more adequate and more confident in their new business price. And so, we see Florida operating not very dissimilar to how we would have seen Florida operate pre-pandemic. It's an elastic marketplace, it's a competitive marketplace, and Texas is very similar along with our smaller states. So it varies a bit by state, but generally across the board, we would characterize the market as hard for us, but with a bit of texture that sits underneath by state.
Operator: Thank you. [Operator Instructions] Your next question comes from the line of Andrew Kligerman from TD (TSX:TD). Please go ahead.
Andrew Kligerman: Hey. Thank you, and good afternoon or evening. May be help me out with Slide 8 a little bit. I think in the remarks, you've mentioned that you've earned rate in the quarter of 9%. As I look at the graph in the right hand corner, it would imply to me that there's maybe another 11 points, 12 points to go in the year. But then I think, Joe, you mentioned 15 points. So I guess Part A is, can you clarify that differential? And then Part B is what do you see as the kind of cadence of that rate earning in over the next three quarters? And maybe I'll even throw in a C, are you filing for new rate increases as we speak? And could you quantify that?
Bradley Camden: Hey, Andrew. Good afternoon. This is Brad. Happy to help. And if I miss something, the three-part question, one, A,B, C, let me know. Looking at the upper right hand chart on Slide 8, for the year, for 2024, we have a total of 24 rates to earn in. We earned in about nine points of that rate in the first quarter. And then that means we've got 15 points for the rest of the year. I would tell you about half of that rate will earn in the second quarter and then the remaining of that will earn in Q3 and Q4. Does that answer your question?
Andrew Kligerman: That's perfect, Brad. And then just are you filing for new rate and could you quantify that?
Bradley Camden: We're always looking to find rate adequacy and keep up with loss trend. When we look at our indication, certain states say we have, we need to file for additional rate. We'll continue to do so as part of normal course. But the big part where we're trying to -- where rate -- earned rate was trying to catch up with loss trend. We've done that. And you're seeing that gap now close. And that's indicative of what's going on and what I just told you, right. We had 9 points in the first quarter, seven in the second, and little trends smaller in the back half of the year. And then, we'll file for rate as we need and as our states indicate.
Joseph Lacher: I think Andrew, this is Joe. The way I might encourage you to think about it is we're filing what I might describe as maintenance rate going forward. And what that would mean is we're trying to get rate that matches what loss trend is and hold ground on the profit margins as a result. So we believe what we believe what we've displayed for you in Page 8 shows the rate required to rebalance the organization to get rate in excess of loss trend to allow us to adjust the non-rate actions and to get things back at a sub-96 -- 96 or below combined and growing. The rate actions going forward will be just designed to keep that in balance and shouldn't be material -- materially moving profit margins around. They should be holding them in that spot and allowing us to grow and staying that way because if you told me six months from now loss trend was a point, we'd have one view. If you told me six months from now, loss trend was seven points, we'd have another. But if it was one, we'd be looking for one. If it was seven, we'd be looking for seven.
Andrew Kligerman: Got it. That makes sense. And just to wrap up, on Slide 15, you've got a chart showing severities. And it looks like first quarter was indeed somewhat significant. So the question is, for what you were just answering, maybe there is some rate that you need to keep up with that trend. And are you always pricing to 96%? You said that number a few times.
Joseph Lacher: So a couple of things. Slide 15 is price indices of certain components of loss trend. Those are there informationally, they're not in and of themselves intended to be pure items that you can go to loss trend. They're intended to give you some sense of how they're moving. What I would describe to you is on an annualized basis, we're seeing severities -- continue to see severity increase annualized that are high-single digits. That's roughly consistent with what we saw and described last quarter. There's always some normal, modest volatility around that, plus or minus a point, they're generally there. That varies somewhat by coverage. It varies somewhat by state, but it aggregates to roughly that level. And we're not -- I'm trying to remember exactly how you phrased the second part of your question. You were asking, are we always pricing to a 96?
Andrew Kligerman: Yeah.
Joseph Lacher: What we're pricing to is to make economically astute equations with that being a target or better. There are times when it might be astute to let it run to a 96.5. There'd be times when it might be astute to let it run to a 92. If as an example, the fastest we could grow and still hire enough claim people might be X percent of PIF and we were at a 92% combined, there'd be no reason to actually get more price competitive and try to write more new business if we couldn't operationally handle it. That would actually produce a bad answer. You deteriorate the probability to provide a bad customer experience, bad customer service, something else. If we were shrinking 2% and running a 92, that's a bad long-term economic answer. We should move back towards the 96. So we're going to be good long-term operators and managers on that. What we've been trying to describe in the last couple of years is a shock to the system and how we got the system out of shock and back rebalanced. And what I tell you, the conversation we probably would have had with you in '18, '19, early '20, would have been we're trying to get to roughly a 96 and grow as much as possible. And that moves around a little bit depending on where the market conditions or environment are. Does that help?
Andrew Kligerman: Perfect. Thank you very much.
Operator: Thank you. And your next question comes from the line of Brian Meredith (NYSE:MDP) from UBS. Please go ahead.
Brian Meredith: Yes. Thank you. I'm just curious -- I didn't hear any comments about the reciprocal and kind of progress there. And I'm just wondering, Joe, maybe you can comment on the fact that you're actually increasing new business. I know you can only put new business to reciprocal. Could that actually accelerate that process?
Joseph Lacher: Sure, Brian. We -- in theory, we could put something other than new business in there. We could populate the reciprocal with reinsurance. Our strategy is to populate it with new business. So there are ways to accelerate the process. I don't think that's prudent, and that's not what we're trying to do. And I'm not sure that's the best way for us to populate it, given all the various -- the various things we're trying to balance in that. It is continuing to operate. We're continuing to write some new business there. This is in the category of -- it's going to have a long-term view before this is going to see it. Not much is going to change quarter to quarter for at least three, four or five quarters. There's going to be a little bit of increasing volume because it's new business. It's likely to have a new business penalty. It may not be making, it's likely not to be making an underwriting profit. It's got to actually get some of those renewing before they produce a little bit. The second renewal produces some underwriting profit. The new business that comes on doesn't. This thing sort of hovers in neutral for a little while until it gets some volume and grows. And the analogy I was fussing with it is it's a little bit like having kids. They suck resources for a little while, then they get a little bit of job and make some money. Then eventually they're productive and move on. This is going to take a little while to get going there, and it really just isn't conducive to a lot of 90-day updates. We'll continue to give them to you, but it's a good question. I understand the interest. We're moving as quickly as we reasonably can, but trying to keep all of those pieces in balance.
Brian Meredith: Got you. And then my second question, I guess given what's happened with policies in force and now we're going to get a ramping things back up, does it give you or are you thinking about kind of reshaping the portfolio geographically? As a result, maybe having some more restrictions, possibly in California, to make sure that's not so heavy in your portfolio going forward? How are you doing that? Is that something you're thinking about?
Joseph Lacher: Sure. Great question. I'm going to give you three thoughts. I'm going to echo what Matt said earlier, remind you of some history, and then point you where we’re going forward, and I'll do those in a little bit of an order. If you go back in the not too distance past, when this team got here, I think in 2016, we were 90-some-percent in California in our specialty auto business. When the pandemic hit, we were 50%. We have been systematically, geographically diversifying the portfolio and actually very rapidly. And we were doing that not by shrinking California, but by growing other geographies more rapidly. That is a backwards look. Forward, we will continue to operate with the thought process of finding a reasonable geographic balance, not because we're trying necessarily to shrink something, but because we think there's other opportunities to grow in other places and that will naturally result. Our best guess is maybe California ends in that 30%, 35% range overall. Now, the middle bucket, which was what Matt said before, and this echoes what we said last quarter. As we're re-expanding new business and reopening items, and as there's the lumpiness with different competitive pieces in markets, you may see California grow -- write more new business and recover faster than a Florida or Texas. You may see Florida or Texas go a little faster than California, and that may actually change month to month. We actually have watched it over the course of the last 60 days, sometimes change week to week in terms of how that's moving in. That is normal. A little chop in the harbor, if you will, that we expect while we're rebalancing. So we're not going to give you any kind of target monthly or quarterly or really any kind of picture of that profile over the next six months while we're trying to get the system reprimed and rebalanced. As we work our way through '25 and '26, I would fully expect it to look very similar to what we described to you pre-pandemic. And I'd expect that top right corner of Page 8 to going back to something that was showing some growth in California, some growth faster than that in Florida and Texas and some growth even faster than that in the other geographies, which effectively was diversifying us away from California by growing other places more rapidly.
Brian Meredith: Makes sense. Thank you.
Operator: Thank you. And your next question comes from the line of Gregory Peters from Raymond James. Please go ahead.
Gregory Peters: Okay. So I get to have two follow-ups. One, I know it's discontinued, but the progress on the run-off preferred business. And then the second question would be around the alternative investment portfolio results in the first quarter. Just wondering if what we saw in the first quarter is that the type of result we should expect out of that portfolio for the balance of the year?
Bradley Camden: Hey, Greg. This is Brad. On the preferred business, the run-off is going as planned, if not a little bit quicker than expected. So the $130 million we indicated this year is on track, maybe a little bit better. So, 85 million plus left to go this year. On the alternative investment portfolio, I think that's on Page 22 of the supplement. If you look there, I think it was down about 5.7 million, Q4 to Q1 in average returns. That's related to a few investments. I don't expect that to be the run rate going forward. The other thing I'd point out though, that the core of the portfolio, the high quality fixed income, has been very stable in that 98 million, 99 million a quarter range.
Gregory Peters: Okay. All right. Thanks.
Operator: Thank you. There are no further questions at this time. I'd like to turn the conference back to Mr. Joe Lacher for closing remarks.
Joseph Lacher: Thank you, operator and thank you everybody for your questions today. Hopefully, as we described, feeling a little bit better about where the direction of the PIF is going and the speed with which it's recovering. I know we're enthusiastic, enthusiastic and excited about it and think it's moving in the right direction, albeit a little bit of work to do. And with that, look forward to speaking with you all again next quarter. Thanks.
Operator: Thank you. And that does conclude our conference for today. Thank you for participating. You may all disconnect.
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