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Kemper increases reserves amid ‘atypical’ surge in Florida PIP litigation

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Kemper Corporation CFO James McKinney has said the Chicago based-specialty insurer increased its prior-year reserves by $25mn due to an “atypical” second surge in Florida PIP-related litigation.

The executive told analysts on a Q3 call significant Florida-PIP related court decisions typically result in a single surge of litigation.

Kemper increased prior-year reserves by $25mn to address the higher rate of litigation in Florida. That followed similar developments in the second quarter. The charge this quarter added 2.4 basis points to the specialty P&C loss ratio of 92.7%.

Kemper’s Q3 P&C combined ratio came in at 111.6%, marking a 25.3-basis-point spike from last year, driven by higher claim frequency and severity trends, and the “atypical” second surge in Florida PIP-related litigation.

Kemper CEO Joseph Lacher said third-quarter earnings, impacted by the pandemic reopening, were “below our long-term expectations and, as a result, disappointing”.

He added: “We previously discussed the anticipated challenges of the current environment, which is dynamic and changing rapidly. Against this backdrop, we're focusing on minimizing these impacts and optimizing the business.”

The executive noted that the pandemic’s reopening led to rapid increases in auto frequency and global disruptions in supply chains, which together led to severity and combined loss inflation at levels “we haven’t seen in the industry for over 30 years”.

Executive vice-president and president of property and casualty Duane Sanders added that the combination of increased frequency as miles-driven surged and supply-chain stress drove loss trend to “unprecedented levels”.

“Since there is little to no rate running through the system, margins were immediately and adversely impacted,” Sanders said.

“Given that rate changes are subject to a regulatory approval process, it will take at least several quarters for their earned impact to be seen in results.”

Kemper swung to a net operating loss of $59.3mn for the third quarter. The results reversed an operating profit of $119.2mn in same period last year. The downturn came as the company shifted to a $157mn underwriting loss from a $165mn gain last year.

Cat losses totaled $32.4mn, primarily related to Hurricane Ida and severe wind/hail events. The specialty insurer said in a pre-earnings announcement that it expected to report $30mn-$35mn in pre-tax catastrophe losses.

Lacher said: “The impact of the reopening and other environmental challenges continued to negatively impact these. We are actively deploying corrective actions to restore target margins and returns. Our balance sheet and business model remain well positioned to navigate through these challenges.”

The executive added that “it is going to take time for corrective actions to earn into our book and return us to target profitability”.

“Our actions will position us for growth in 2023,” he said. “Our balance sheet provides appropriate financial stability for these types of challenges. Our strong capital and liquidity positions enable us to navigate and optimize the current environment.”

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