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'Perfect storm' over last acquisition will not keep Kemper from pursuing deals

will considerstrategic acquisitions even as it continues to address challenges associatedwith its last deal.

In aSept. 21 slide deckfor a strategic update call, the company listed profitable organic growth andacquisitions as its top two capital deployment priorities. Deals Kemper mightconsider include new specialized niche targets, transactions that leveragescale in its life operations, and bolt-on opportunities in the preferredpersonal lines and nonstandard auto businesses.

"Wethink there [are] opportunities for us to take core capabilities and leveragethose," President and CEO Joseph Lacher Jr. said during the .

Muchof the event focused on actions Kemper is taking to address a company that, asthe CEO said, "has got a lot of things that are a little bit screwedup." Among them is the nonstandard auto-focused Alliance United Group thatKemper purchasedin April 2015, seven months before Lacher, a veteran of and , .

"Candidly,the perfect storm hit for Kemper after the acquisition," said GeorgeDufala Jr., president of the company's P&C division. The target, he added,"was behind on rate and claims staffing just as new business andfrequency began to climb."

Alliance United posted a net operating loss of $12 million in the secondquarter with an underlying loss ratio of 100.8%, dragging Kemper's P&Cinsurance segment to an $8.9 million loss for the period. The statutory netunderwriting loss for AllianceUnited Insurance Co. widened to $29.3 million in the second quarterfrom $10.2 million in the year-earlier period; its statutory combined ratio forthe period of nearly 123% marked an increase of approximately 12.6 percentagepoints year over year.

Although Alliance United may have attracted the greatestscrutiny, its struggles represented only one of the various headwinds facingKemper at the end of 2015. The company said its overall business wascharacterized by an "unclear strategic framework and focus,"financial underperformance, an aging information technology infrastructure anda "culture of complacency." Executives outlined the progress theyhave made to date in 2016 in addressing those "fixable weaknesses"while also seeking to build on strengths that include more than $200 million ofexcess capital, a strong brand and a broad portfolio of noncorrelated risks.

Its focus now is to emphasize consumer-related businessesthat target underserved markets; have limited, weak or unfocused competition;and require unique expertise while leveraging core capabilities in areas suchas underwriting, risk management and business intelligence. Additionally,Kemper will look to create value organically and inorganically as it seeks toultimately produce high-single- or low-double-digit returns on equity. Theslide presentation accompanying the call showed a "pro forma ROE" ofbetween 7.5% and 8% in 2019, up from an annualized result of 3.5% for the firsthalf of 2016, with 2.5 percentage points of the improvement coming from reducedloss and loss adjustment expense costs and between 1.5% and 2% of reducedexpenses.

Lacher said he has seen that sort of improvement happenbefore during his long tenure at Travelers when the company went from producinga "crummy ROE" in the early 1990s to eventually being held up as a"beacon" in the industry from a financial perspective. But, heemphasized, that shift did not occur overnight.

"Everybody on this team wants to be drivingdouble-digit ROEs and be competitively relevant, and that's what we arebuilding toward," he said.

Dufalasaid Kemper will remain "aggressive" with Alliance United ratechanges, but he cautioned that it would take "several pricing cycles"to get the appropriate rate for this business. He said Kemper is also tacklingAlliance United's challenges with underwriting actions, managing growth andstepping up claims-handling efforts.

"Cycletime, for example, was not a priority and, unfortunately, got away from ourclaims organization," Dufala explained. "As we all know, claims donot get better with time and high levels of new business production furthercomplicate matters."

Kempercontinues to make progress in restoring profitability at Alliance United, butexecutives said the company still has some work to do in that regard.

"We've clearly provided what I might describe as a tonof penicillin to Alliance United to try to fix the problems there," Lachersaid. "So while not at full health, and not quite close to full health,the actions are identified, the progress is being made, it's movingconsistently with our expectations. [It] has a ways to go, but we'reincreasingly confident that we're on the right track."