Kemper Corp. said it is taking rating and other actions, including canceling some agents, as it seeks to recover from inflation-riddled fourth-quarter financial results.

Kemper Corp. reported a net loss of $105.8 million for the fourth quarter of 2021 compared to net income of $97.5 million for the same quarter in 2020.

The company’s consolidated net operating loss was $130.8 million for the fourth quarter compared to net operating income of $105.8 million for the fourth quarter of 2020.

“This was another challenging quarter, and it goes without saying we’re disappointed in our profitability,” said President, CEO and Chairman Joseph P. Lacher Jr. “The pandemic-driven environmental challenges the industry has experienced in the last couple of quarters intensified further in the fourth quarter, impacting results in each of our businesses.”

The Specialty Property & Casualty Insurance segment reported net operating loss of $125.2 million compared to net operating income of $91.1 million in the fourth quarter of 2020. The segment’s underlying combined ratio was 119.4 compared to 91.3 in the fourth quarter of 2020.

The Preferred Property & Casualty Insurance segment reported net operating loss of $7.4 million for the quarter compared to net operating income of $16.9 million in the fourth quarter of 2020. The underlying combined ratio of 106.9 reflected higher catastrophe losses and loss adjustment expenses compared to 93.6 in the fourth quarter of 2020.

Commercial auto turned in a 100.2 combined ratio (compared to 87.2 for the same quarter in 2020), and the personal auto combined ratio was 135.5, after 112.3 in 2020’s final quarter.

Total revenues for the fourth quarter increased $101.8 million, or 7 percent, to $1,493.9 million, compared to the fourth quarter of 2020, driven by $149.9 million of higher Specialty P&C earned premiums primarily due to the acquisition of American Access Casualty Co., a specialty private passenger auto insurer, in April. Net investment income increased $5.7 million to $108.4 million.

The Chicago-based Kemper is a specialty insurer in areas including auto and personal insurance, life and health. More than 30,000 agents and brokers represent Kemper, which has more than 9,300 employees.

Lacher singled out inflation as one factor having an immediate and negative impact on results. According to Kemper, labor rates, auto body repairs and rental car rates all continued to rise due to inflationary trends related to supply chain issues and labor shortage. For example, in 2021, used car prices were up 51 percent from 2019 and 37 percent over 2020, while in the last quarter alone, they were up 9 percent, Kemper reported.

Lacher said the insurer sees this aggregate inflation continuing in the short term but said Kemper has made “significant progress on both rate and non-rate profit improvement” during the quarter.

The company noted that it couldn’t seek rate hikes until frequency rebounded from the lockdowns and stressed that recovery will take time.

“Rate increases are subject to regulatory approvals, roll on to policies at renewal and are earned over the life of the policy. The benefit of those increases is therefore, delayed,” he said on an earnings call with analysts.

Duane Sanders, president of the P&C segment, noted that at the onset of the pandemic, miles driven and accident frequency were historically low, and Kemper not only had effectively no rate increases, but like other carriers, also gave premium rebates to customers. Then as the lockdowns eased, loss trends shot up. “These dynamics will continue to put pressure on margins in 2022 as the written rate translates to earned rate later in the year,” he said.

Sanders said the firm has exceeded its targets for the number of rate filings submitted, the percentage of its book impacted and the level of rate increases approved—actions that will favorably impact future results and restore margins.

For example, during the third and fourth quarter combined, the P/C teams filed for approximately 11 points of rate on 56 percent of its personal auto books and is filing for more rate increases in the first quarter.

Lacher said he feels that regulators are recognizing the “uniqueness of this space” and it has had particular success in Florida and Texas getting approval for multiple rate filings for significant amounts of rate.

The insurer has also filed for increases of about 7 percent in California, where he said he believes the insurance commissioner and the department are thoughtful about “all of the issues that are going on” and recognize “like other insurance departments around the country that loss inflation is running high.”

Beyond Rates

Kemper is doing more than waiting for rate increases to kick in.

“We are canceling agents. We have adjusted new business, underwriting tiering. We are working with commissions,” he said. The firm is also changing billing plans and “adjusting what risks it writes,” Lacher told analysts. He said the insurer is “pushing pretty hard” on underwriting restrictions.

“All of those things are occurring fairly significantly across our book of business, and those do have a tendency, depending on the activity, to have a quicker earned impact,” he added.

“Unfortunately, the most significant improvement levers will take time. It’s a little like planting tomatoes after the winter. You can’t start until after it warms up, and it’s going to take 80 days before you can eat the fruit. There’s no way to get the fruit faster.”

The results led ratings analysts at AM Best to downgrade Kemper’s outlooks to negative from stable. Kemper’s Financial Strength Rating (FSR) of A (Excellent) was affirmed.

AM Best said the negative rating outlooks for Kemper P&C—the lead rating unit of the group—and for Kemper Corp., as well as for its nonstandard auto insurer Infinity, were primarily due to the “significant earnings deterioration” that resulted in reduced capital levels, the likelihood of continued earnings weakness and the potential for further capital erosion in 2022.

AM Best confirmed that underlying the deterioration in underwriting performance was a sharp rise in claims severity in the automobile line of business, which accounts for approximately 95 percent of Kemper P&C’s premium volume, “largely reflecting significant supply chain issues, labor shortages and inflationary pressures.” The automobile line of business also experienced higher claim costs, as well as a higher claim frequency, particularly in the latter half of 2021.

Also, AM Best noted that Kemper’s life and health insurance unit reported positive net income of $28.2 million in 2021. However, that was significantly down from $60.0 million in 2020, primarily reflecting higher pandemic-related life insurance mortality.