Kemper Corp. is doubling down on the nonstandard auto business once again, this time from a much larger base, after navigating "a perfect storm" in the market segment following a previous acquisition.
The company's agreement to purchase Infinity Property & Casualty Corp. for $1.32 billion, announced Feb. 13, would elevate the nonstandard auto business to account for approximately 58% of its pro forma 2017 earned premium from 41% as originally reported. And the increase would come at a time in which the profitability of Kemper's existing nonstandard auto businesses has been improving.
The nonstandard market typically includes those drivers deemed to represent higher risks due to factors such as their driving records, experience, lapses in prior coverage and credit histories. Customers in the market often purchase liability coverage at the minimum levels required under individual state laws.
Kemper confronted a scenario after buying Camarillo, Calif.-based nonstandard auto insurer Alliance United Insurance Co. for $71.6 million in April 2015 where the company was behind on its pricing and staffing levels at a time in which claims frequency was beginning to rise. Alliance United produced noncatastrophe loss and loss-adjustment-expense, or LAE, ratios of 92.8% for the final eight months of 2015 and 94.0% for full year 2016 as Kemper employed a series of corrective actions that included rate increases, aggressive claims handling, and growth management.
Company officials warned in 2016 that it would take time for those initiatives to fully resolve the underlying issues, and Alliance United's 2017 results appear to demonstrate that the patience has paid off.
The noncatastrophe loss and LAE ratio in Kemper's overall nonstandard auto business improved to 78.6% in 2017 from 87.1% in 2016 and 86.8% in 2015. Kemper said in its annual report on Form 10-K that Alliance United's underlying loss and LAE ratio was 11.5 percentage points lower in 2017 than in 2016, which implies a result of 82.5%.
From a statutory perspective, Alliance United's loss and LAE ratio showed year-over-year improvements for four consecutive quarters through the third quarter of 2017. Its combined ratio for the third quarter of 2017 of 100.2% was its lowest in a reporting period in three years. While Alliance United produced statutory underwriting losses for 14 consecutive quarters entering the last three months of 2017, it reported progressively higher levels of pretax operating income between the fourth quarter of 2016 and the third quarter of 2017. Prior to that stretch, it had last posted a pretax operating profit in the fourth quarter of 2014.
Kemper's legacy nonstandard auto business generated net premiums written of $302.8 million in 2014. Alliance United's direct and net premiums written for that year totaled $334.9 million and $209.8 million, respectively, with the gap between the two figures the product of a since-terminated quota-share reinsurance treaty with a Maiden Holdings Ltd. subsidiary.
The combination of the legacy and Alliance United businesses produced nonstandard auto net premiums written of $992.3 million in 2017, up from $832.6 million in 2016. Infinity Property & Casualty had nearly $1.40 billion in gross premiums written in 2017, of which $1.22 billion pertained to its personal auto business. The balance reflected writings in the company's commercial auto and classic collectible car businesses.
Underwriting results in the personal auto segment of Infinity Property & Casualty appear stronger at the time of this deal relative to those of Alliance United at acquisition. When Kemper agreed to buy Alliance United in December 2014, the target's combined ratio for the trailing-12-month period ended Sept. 30, 2014, was nearly 100.8%. Infinity Property & Casualty reported a statutory combined ratio of 93.0% for its personal auto business in 2017, down from 94.9% in 2016. Its GAAP combined ratio across businesses improved to 95.2% in 2017 from 96.7%.
"Infinity has consistently written profitable business," said Kemper President and CEO Joseph Lacher during a conference call, later adding that "strong results like these didn't just happen."
As Kemper moves to create what Lacher called "the premier ... franchise" in a fragmented nonstandard auto market, the company said it remains committed to supporting the growth of its preferred auto product. Though preferred auto would decline to represent about 20% of Kemper's business mix on a pro forma basis from 31% as originally reported, a letter to agents indicated that the product represents "a key part of our long-term plans."