Good morning, ladies and gentlemen, and welcome to Kemper's Second Quarter 2015 Earnings Conference Call. My name is Jonathan, 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, the conference is being recorded for replay purposes. I would now like to introduce your host for today's conference Ms. Diana Hickert-Hill, Vice President Investor Relations and Corporate Identity. Ms. Hickert-Hill, you may begin.

Thank you, operator. Good morning, everyone and thank you for joining us. This morning you will hear from three of our business executives starting with Don Southwell, Kemper's Chairman, President and Chief Executive Officer; followed by Denise Lynch, the Kemper's Property & Casualty Group Executive; and Frank Sodaro, Kemper's Senior Vice President and Chief Financial Officer. We will make a few opening remarks to provide context around our second quarter results. We will then open up the call for a question-and-answer session. During this interactive portion of the call, our presenters will be joined by John Boschelli, Kemper's Senior Vice President and Chief Investment Officer. After the markets closed yesterday, we issued our press release and financial supplement. In addition, we filed our Form 10-Q with the SEC. You can find these documents on the Investor section of our website, kemper.com. Please note that our discussion today may contain forward-looking statements. Our actual results may differ materially from these statements. For information on potential risks associated with relying on forward-looking statements, please refer to our 2014 Form 10-K filed with the SEC, as well as our second quarter 2015 Form 10-Q and earnings release. This morning's discussion includes non-GAAP financial measures that we believe may be meaningful to investors. In our supplement and earnings release, we have defined and reconciled non-GAAP financial pressures to GAAP where required in accordance with SEC rules. And finally, all comparative references will be to the second quarter of 2014 unless we state otherwise. Now, I will turn the call over to Don.

Thank you, Diana. Good morning, everyone and thank you for joining us today. I'll provide comments on three topics, our overall performance, our Life and Health segment and our investment portfolio performance. Denise, will update you on our Property & Casualty segment, including some additional color on our recent Alliance United acquisition. Frank, will cover the financials, capital and liquidity, I'll finish up with comments on our capital allocation priorities. Looking at our second quarter in total, Kemper earned $30 million of net income in the quarter, an increase of more than $20 million, primarily from realized gains on equities and net income from our Life and Health segment. While we measure ourselves primarily on our operating performance, harvesting gains on equity is part of our investment strategy, these gains can be lumpy, but they are real. We earned $7 million in net operating income in the quarter, down from $10 million. The change was based on a combination of factors, primarily a lower level of favorable development in a software write-off. These were partially offset by catastrophe losses which were significantly lower this year, but catastrophes were elevated in both periods. We continue to reshape our Property & Casualty business. We completed the acquisition of Alliance United. We are already benefiting from its performance in important California non-standard auto market and it feels good to be growing again. With Alliance United $62 million earned premiums in the quarter and overall P&C revenue trends improving. New business is up and retention is increasing on our home and personal auto lines, Denise will cover the segments performance in more detail, but I am pleased that we are seeing progress. Turing to our Life and Health segment. We delivered $14 million in earnings in the quarter, down $2 million. Revenues were up…

Thanks, Don. I want to update you on three topics before I cover the quarter’s results. First, our Alliance United Group acquisition. Second enhanced reporting in our personal auto lines of business, and third the software write-off in the quarter. Let's start with the Alliance United acquisition. Independent broker feedback is positive and we are seeing a nice steady flow of new business and continued renewal policy persistence. We are making substantial progress with the integration of shared services, which is proceeding on plan. I will note that in this quarter Alliance United was accretive to net income and we expected to contribute $3 million to $4 million to Kemper's total net income in 2015. Second, I'll note that beginning with this quarter we are providing additional disclosure for the personal auto lines in our financial supplement, which now details results for both the preferred and non-standard personal auto lines. We are including Alliance United within our 2015 non-standard auto line of business results. Because Alliance United has a lower expense ratio and a higher loss and loss adjusting expense ratio compared to our other non-standard business, we expect to see some shift in expense and loss ratios for both the non-standard auto line and for the Property & Casualty segment in total This will affect quarter-to-quarter and year-over-year comparisons. This also affects guidance on our underlying loss in LAE ratio. Our legacy lines have posted a half point improvement year-to-date and we expect 1 to 3 points of underlying improvement for the full year in our legacy business. However, with only two months into the acquisition we are not ready to provide underlying loss in LAE guidance on Alliance United. On the software write-off of $7 million after tax, we undertook a project several years ago modernize our Property…

Thanks, Denise. And good morning, everyone. Today I'll cover Kemper’s consolidated second quarter performance, capital and parent company liquidity. Kemper reported second quarter net income of $30 million or $0.57 per share compared to $9 million or $0.17 per share. After tax net investment gains were $21 million for the quarter compared to net investment loss of less than $1 million. Our net operating income was $7 million or $0.13 per share for the quarter compared to $10 million or $0.18 last year. Total revenues were about $610 million for the quarter, an increase of $67 million, or 12% primarily from a $62 million of earned premium from the Alliance United acquisitions and higher net realized gains somewhat offset by lower earned premiums from our legacy P&C lines. Net investment income increased $4 million for the quarter, the annualized pretax equivalent book yield on average invested assets increased to 5.4% in the quarter compared to 5%. The Property & Casualty segment reported a net operating loss of $3 million for the quarter compared to a loss $1 million last year. Although both quarters were hit by higher than expected catastrophes, if you exclude the software write-off, result improved as lower catastrophes were partially offset by lower levels of favorable prior year reserve development, and about 1 percentage increase in the underlying combined ratio Excluding the impact of the Alliance United acquisition, the underlying loss in LAE ratio increased by about 1 percentage point, primarily from the impacts of the current year development in both years, an uptick in non-standard auto frequency and higher severity in home owners, partially offset by higher average earned premium. Net operating income for the Life and Health segment was $14 million for the quarter compared to $16 million last year, as higher policyholder benefits and…

Thanks, Frank. I'll touch briefly on our three long-term capital allocation priorities. First, funding profitable organic growth, second, strategic acquisitions and third returning capital to shareholders, both through share repurchases and dividends. Starting with our top priority of funding organic growth, we are encouraged by our improving new business and retention trends and Alliance United is expected to continue to grow. And our second priority, strategic acquisitions, we're pleased to see the initial results from Alliance United in our Property & Casualty segment. We continue to work through the integration process and look forward to the benefit of having it in our portfolio of companies. We keep powder dry as we continue our discipline we're evaluating strategic opportunities that can benefit Kemper and our shareholders. And our third priority remains to return capital to shareholders, on that front we maintained our competitive dividend of $0.24 per share and continued to repurchase shares. In total, we returned $14 million to shareholders in the quarter. Now, I'll turn the call over to the operator to take your questions. Operator?

[Operator Instructions] Our first question comes from the line of Steven Schwartz from Raymond James & Associates. Your question please.

Hey. Good morning, everybody. I got two. First, Frank, you seem to be dancing around it, but could you put a number on the legal expenses in Life and Health?

Sure, Steven. The legal expenses year-over-year were up around $4 million and this is really -- the bulk of this is related to one case, it's an appointment matter and we don’t expect that case to develop materially going forward.

Okay. Thank you. And then for Denise just, I guess maybe an informational question, you noted the frequency much higher in non-standard didn’t sound like it was much higher in standard just -- is it because these people are riskier and they are in their cars or is it because their mileage is going up much more than a standard maybe because they benefit more from lower gas prices, do you have any thoughts on that?

It is an interesting contrast in our book for business when we look at the quarter where our standard and preferred frequency trend continues to be quite favorable in fact in the quarter a negative trend and even if we look over or in the quarter negative and then over a longer period of time a negative trend, but as compared to non-standard where at least in this particular quarter we saw a spike a frequency. When we look over the longer term though, we actually see frequency even in our non-standard lines of business at a negative trend. So I can’t really say it’s the customer profile and their driving behaviors. I can observe what we are seeing in the marketplace for his quarter. I can see the coverage is that it's in and the states where we're observing it, but we continue to push to understand a little bit more, a lot more about the drivers that we observed in this quarter.

Okay, just one more, could you discuss may be the market in California for Alliance United, I know Mercury has been talking about taking rate?

Yeah, we continue to see this as a good market for Kemper. We've been in the market for a good long time. We understand the market well and with the addition of Alliance United, we certainly have a bigger footprint there. We do see it as a comparative market. There are many players there in California and at the same time what we do see are non-standard carriers taking rate increases much in the same way that we are approaching managing that market entering the pure premium trend that we see.

Okay. Great. Thank you.

Thank you. Our next question comes from the line of Paul Newsome from Sandler O'Neill. Your question please.

I want to just follow-up a little bit on the legal cost there going to the right and maybe if you could help us a little bit of better sense of the run rate of the earnings in the Life business, those given additional legal expense plus other issues. I have the little trouble getting that around to just how quickly those earnings may or may not be going on.

Paul, Frank commented on this one particular case it took our legal expenses up by roughly $4 million this quarter and that we believe is non-recurring. In terms of guidance on earnings, we really haven’t given that. Expenses you can see the trans absent this case and investment income is a significant driver and we’ve tried to be clear on investment results. If I guess I’m not sure quite how to answer your question short of giving guidance which we haven’t done.

Is it safe to say that given the current interest environment, we pulled the express legal cost out but this is a business that would expect us to be profit continue to fall…

I would say that over long period of time and our portfolio rate will continue to fall unless interest rates rebound beyond where they are today?

Did I hear, did you say, did I hear correctly that the Alliance United business should add about $3 million to $4 million in 2016 is that the expectation?

Yes that’s correct. I’m sorry -- I want to make sure Paul I heard your question, were you asking what it was going to add to the current year?

Well, yeah I just wasn’t certain I heard that correctly.

It was $3 million to $4 million in the current year.

Return on investment.

Well, and you have to remember in the first year here we have some things going on, we've integration cost that are occurring and we have purchase accounting that is still settling in. We're going to have that finalized hopefully in this third quarter. So what we've said about that is we like the acquisition. We think the returns will be accretive and we just need everything to settle and if that happens we will look to provide more guidance going forward.

Thank you.

Thank you. Our next question comes from the line of Katelyn Young from William Blair. Your question please.

Hi good morning everyone. I’m in for Adam Klauber. Few questions for you guys, sounds like you are seeing some moderate rate increases on the non-standard side and your release you spoke to maybe single or mid single digit rate increases but there are quite a few a pauses in the area in this respect and what not, can you just speak a little bit more on the rate side that you are seeing?

Yes I'll be happy to talk about that. So we are addressing the portfolio, the non-standard portfolio for Kemper and we’re treating it in a variety of ways, certainly rate is one and we certainly did have rate in the pipeline of about call 6%ish before say the beginning of the second quarter when we began increasing actually our rate plans. So we began taking more rates and set out a new objective even before this quarter results, but we are now increasing our rate plan to somewhere around 9.5% on that non-standard auto book of business. But in addition evaluating the trends that we're seeing or at least the quarter the pure premium trend and what's driving that frequency, we want to make sure that we're treating that appropriately. So we're also looking at the drivers and we're also looking at agency management and other underwriting actions that we may want to take to address this portfolio and improve its overall performance.

Sure, all right, thank you and then on the acquisition, are there further integration costs to be had throughout the end of the year that would be material noticeable at least in the third quarter?

Yes we have integration cost that we will be kicking up here over the remainder of the year and it will spill into next year also. So it's hard to nail down the exact timing of when they're going to hit, but we expect them to impact the results in the short run.

Okay. And do you have an order of magnitude or estimate at this point in time or…

Yes somewhere really I am not comfortable nailing down the exact number mainly because of the timing of it, but they will -- it will have an impact on the numbers until they are fully integrated, which we plan to have within the first -- within the first couple of years for sure.

Okay. Great. Thank you.

[Operator Instructions] Our next question comes from the line of Christine Worley from JMP Securities. Your question please.

Thank you. Most of my questions have been asked and answered, but I just wanted to follow up on the auto loss trends a little bit more, one of your peers was seeing a big uptick on the severity side and I am sorry if I missed it, but it doesn’t sound like you're seeing that. Can you talk about the trends that you're seeing in severity both on the standard and the non-standard auto books?

Sure Kristine we're not seeing that same rise in severity across the book. So in the quarter for our standard and preferred, our severity continues to be actually pretty benign and then on the non-standard the same thing pretty benign. Now that may vary a little bit by coverage. We might see a little bit more by converges, but in total we're really not seeing the kind of spike in the quarter. And then when we look over the longer term for preferred and non-standard, for the preferred book of business it's really the same story. It's pretty flat in a way of longer term severity trend although it will vary a little bit by coverage part. And then when we think about the non-standard book of business and look at their longer term trends it is up a little bit more low single digits on severity and again varies by the coverage part. So that's really what we're seeing in the book of business both in the quarter and over the longer term trend.

Okay. Great. Thank you very much.

Thank you. Our next question comes from the line of Brian Rohman from Boston Partners. Your question please.

Hello good morning, thanks for taking my questions. Couple of questions, Allstate talked about frequency and it's very trends in their auto book of business, are you seeing what they're seeing or is your environment different.

I would be happy to address to that. What we’re seeing is different trends on our different portfolios. We have our standard preferred auto book of business and a non-standard book of business. We're observing in our standard and preferred book really is benign frequency in the quarter, negative frequency in the quarter and over the longer term trend really benign frequency in that preferred book of business in fact negative trend. On the non-standard book of business though that is the story in the quarter and in that non-standard book of business that’s where we saw an elevation in frequency in the quarter where I talked about pretty significant frequency increased of about 6% there in our non-standard book of business, which is very different than our longer term trend, which has been negative frequency trend in that non-standard book of business.

And is there frequency change also in the new California book of business?

We are observing frequency in our Alliance United book of business as well yes. There is positive frequency trend not favorable but positive frequency trend in the alliance in either book of business as well.

Did you factor in when you bought company or is that turning out to be bit of a surprise?

It’s early Brian but I would say that we’ve seen nothing that’s surprises us yet about the Alliance United acquisition.

Even though frequency is up?

We don’t have the same kind of long term trends to look at and we’ve had Alliance United for two months and one month we had very low claim counts and another month higher claim counts in another mother higher claim counts. So it’s a little hard to say exactly what to expect there but by and large what we’re seeing is consistent with what we expected to see when you priced this acquisition.

Okay. Second question premium growth if I remember from the discussion on the P&T side standard order and preferred auto premium went down, commercial auto premium was down and I believe -- I can't remember what you said about non-standard, but general comment and question is absent the acquisition premium were down and are you still re-underwriting the book of business so we’re still seeing some stuffs that you don’t want?

Yes, they the legacy book of business as we call it continues to be down on a year-over-year basis as we had then doing extensive re-underwriting and pricing of the book of business over a period of time. And many of those actions are in and working their way through the book. So we’re at the tail end of many of those. Although we continue to monitor and adjust our game plan as we need to, to drive the progress that we expect to continue to see. What I can say also is that our new business premium is in fact strengthening and we have several quarters of strengthening new policy count and our renewal retention continues to strengthen, but as we look at year-over-year comparisons we continue to be down as that re-underwriting and pricing in the book of business works its way through

And the agency count or agent count, how is that going?

We continue to manage agents, some agents, most of our agents stay with us. Some agents we terminate through our agency management process and then we've been appointing agents where it's appropriate. Net, net we're up slightly on a year-over-year basis, our new agents both from targeting appointments to support certain product lines and then also through some of our cross appointment process.

Okay, a couple more question if you would, the software write-off is let’s see this is the second software write-off in the last three or four quarters giving your commentary today are you suggesting there is nothing less to write off and are use to right offs related?

Okay, let me take that question, years ago the company initiated several projects to consolidate and replace core systems for P&C. Along the way there were successes such as our claim system, but in the third quarter of '14, we wrote off the policy administration system. Since the billing project was proceeding on plan as the time of that policy write-off, we continue to work with the vendor to complete the billing software project. During the second quarter of '15 though we concluded that the billing system could not be completed at a cost or a timeframe that was acceptable and decided to stop work on the system therefore, the asset was written off. Now the vendor is CSC and we have other relationship with CSC, but no longer have any capitalized assets for projects in development with CSC and we’re evaluating alternatives to replace the system.

Do they owe you any money?

We'll just say we are pursuing our legal options. So what's happened here is not -- is very much out of the ordinary and I can read into your tone that nobody is particularly happy with this.

You can’t be happy with it Brian?

Pardon.

You can't be happy with it. And it's a lot of money.

All right last question commentary because we're stockholders, we're not happy with the stock performance. The priorities for excess capital, I would at this point move share repurchase and capital return up to the top and I would move acquisitions to the bottom. And given what's going on in the re-underwriting in the book of business you've got plenty of capital. You've been returning what you describe as excess capital to write the existing book of business, it is more of a comment than it is a question, but I would be interested in your reaction?

Well I’m happy to note your suggestions and we try to balance all these capital priorities and have a good record of returning capital to shareholders, which seems to be your primary interest on that very well and very consistently over time.

Okay. Great. Thank you. Thanks for taking my questions.

Sure.

Thank you. This does conclude the question-and-answer session of today’s program. I would like to hand the program back to Don Southwell for any further remarks.

Thank you, operator. Our results this quarter were mixed. We had another good quarter on investments. The Life and Health segment continues to be stable, Property and Casualty segment non-standard auto profitability was pressured especially given the marked increase in frequency. However, we see good results in preferred auto, improving results in commercial vehicle, encouraging revenue trends and a great start to the Alliance United Integration and its contribution to our financial performance. We are focused on driving further improvements. Our team remains committed to delivering the shareholder returns we all seek. Thank you for your time today. And I look forward to updating you again next quarter.

Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.