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Kemper Corp  (NYSE:KMPR)
Q3 2018 Earnings Conference Call
Nov. 05, 2018, 4:15 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to Kemper's Third Quarter 2018 Earnings Conference Call. My name is Brandon, 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 call, Michael Marinaccio, Kemper's Vice President of Corporate Development and Investor Relations. Mr. Marinaccio, you may begin.

Michael Marinaccio -- Investor Relations

Thank you, Brandon. Good afternoon, everyone, and welcome to Kemper's discussion of our third quarter 2018 results. This afternoon, you'll hear from Joe Lacher, Kemper's President and Chief Executive Officer, Jim McKinney, Kemper's Senior Vice President and Chief Financial Officer and Duane Sanders, Kemper's Property & Casualty Division President.

We will make a few opening remarks to provide context around our third quarter results and then we will open up the call for a questions-and-answer session. During the interactive portion of the call, our presenters will be joined by John Boschelli, Kemper's Senior Vice President and Chief Investment Officer; and Mark Green, Kemper's Life & Health Division President.

Before the markets opened this morning, we issued our earnings release and published our third quarter earnings presentation and financial supplement. In addition, we filed our Form 10-Q with the SEC. You can find these documents on the Investors section of our website at kemper.com.

Our discussion today may contain forward-looking statements. Our actual results may differ materially from these statements. For an information on potential risks associated with relying on forward-looking statements, please refer to our 2017 Form 10-K as well as our third quarter 2018 Form 10-Q and earnings release.

This afternoon's discussion also includes non-GAAP financial measures, that we believe are meaningful to investors. In our financial supplement, presentation and earnings release, we have defined and reconciled non-GAAP financial measures to GAAP. We are required in accordance with SEC rules. You can find each of these documents on the Investors section of our website at kemper.com

Finally, all comparative references will be to the third quarter of 2017 unless otherwise stated.

I'll now turn the call over to Joe.

Joe Lacher -- President and Chief Executive Officer

Thanks, Mike. Good afternoon, everyone and thank you for joining us on the call. Before we get into specific discussions of our results, I want to give you some overall color commentary. We had a great quarter and want us an organization that we are particularly pleased with. We had strong earnings and significant organic growth particularly inside our specialty auto business with double-digits increases in policies and force.

We also had a series of one-items this quarter that impacted results. I mentioned them, because they are examples of our commitment to look at every aspect of our business in order to unlock value. These weren't merely fortuitous. They were a testament to our focus specifically our relentless execution on looking for ways to create that value. We did all of that while closing a major transaction by acquiring Infinity and paying close attention to all phases of it's integration.

The quarter had a lot of moving parts and our team did a great job juggling all of those balls and producing great financial results. I want to pause for a moment and thank all of our employees for their dedication and hard work that enabled the success.

Now turning to the presentation, and indulge me for a minute. I'm going to talk through a couple of pages we reviewed before. I know we have a number of new potential investors listening, it's useful to remind everyone of our strategy and focus for value creation and the rest of the presentation you'll see evidence of our successful execution on that strategy.

Beginning with page three, Kemper is a leading specialized multi-line insurer providing specialty auto, referred home, and auto and basic life accident and health products. We continue to maximize the benefits of our diversified platform to create long term value for our stakeholders. Our insurance subsidiaries are highly rated. We have distribution network consisting of 2200 career agents and approximately 30,000 independent agents.

Continuing to page four, our long term perspective continues to focus on building Kemper's overall value by leveraging our competitive advantages, while building core capabilities to earn consistent returns and increase book value per share. Our strategy remains focused on consumer related businesses in growing and underserved niche markets with limited competition where our unique underwriting claim, distribution and analytics expertise provides us with a sustainable competitive advantage.

Now turning to page five. I'm excited about another milestone in our transformation, the introduction of our new brand elements. Our new visual identity, brand positioning and architecture build on the existing power of our businesses and help to communicate the core of who we are, our strength and stability and our expertise in serving the unique needs of our customers.

Our previous brand architecture had over 20 consumer facing trade names. Our teams are working hard with so many identities we couldn't leverage much of anything through this fragmented approach. Unifying around a common brand architecture makes it simpler and easier to focus our employees on our target customers, on building competitive advantages, on attracting and retaining talent and helping us to do what we need to do to win in the marketplace and ultimately on creating value for our shareholders. It's not just about a logo. It's an enabler.

We have a thoughtful implementation plan on this appropriately transitioning legacy brands over the next six to eight months. We don't anticipate any material disruption and the cost to make this change were anticipated and included in the transaction integration expenses. As I stated earlier, we closed down our acquisition of Infinity on July 2.

If you turn to page six, I want to remind you of the transaction rationale. It squarely align with our overall strategy of building strength in niche and under serve markets. By combining the capabilities and strength of our two companies, we've created a leading specialty auto franchise. We gain the benefits of our larger platform including stronger claim capabilities enhanced product management strength, improved distribution breadth, the ability to retract and retain -- retain top talent and a higher revenue base to absorb fixed costs. This helps us serve our customers exceptionally well and win in the marketplace.

On page seven, you'll find an update on our integration. We had integration teams formed within days of announcing the transaction to ensure we would deliver best in class capabilities for the combined organization. Upon closing, we immediately began executing on their plans. We've already made meaningful -- excuse me -- We've already seen meaningful benefits and expect more to come.

I'll take this opportunity to highlight a few of these benefits; first the legacy Infinity leadership team remains highly engaged and in considerable depth and breadth to our platform. Our claim departments are already integrating and leveraging our combined strengths and we're in the process of using our data to enable us to better develop the price and manage our products. The transaction rationale is playing out as we expected.

The last point, I'll mention is that our synergy realization remains on track, there is no change to the estimated projections we provided in February. That said, to date we realized some initial synergies quicker than we expected. We've always anticipated that we may need to temporarily increase some expenses to unlock certain longer-term synergy benefits. You could expect some lumpiness in the expense line to occur over the next several quarters as we make some short-term investments to fully realize those synergies, but the end total isn't projected to change.

Before we look at page eight, let me take a moment to briefly talk about what we mean by as adjusted. The detailed reconciliations in the back of the presentation. The numbers as reported don't have infinities historical information and they do have purchased accounting entries particularly related to VOBA running through them. And as a result it's very hard to see underlying business trends. So, when we discuss as adjusted or adjusting for purchase accounting and adding historical intensity information to make the trends more visible and understandable.

Now let's turn our attention to page eight review the highlights of our third quarter. Overall, we had a strong quarter reporting net income of $92.2 million or a $40 per share as reported or $131.7 million or $2.1 per share as adjusted. Adjusted consolidated net operating earnings per share increased from $0.85 per share to $1.59 per share as reported. Earned premiums increased 76% in the quarter to $1,053 million or 12% on an as adjusted basis primarily driven by volume growth within our specialty auto business.

In the P&C segment, we had overall strong profitability and 15% increases in policies and forth for the specialty auto business. We saw an improved underlying combined ratio in our preferred auto business. Please remember when you look at the third quarter results there is a seasonality impact the third quarter historically sees the lowest auto combined ratios.

In life and health we had very stable earnings and predictable cash flows to further note that the key part of our strategy is the diversification benefit these businesses provide. Our investments continue to be a strength and our balance sheet capital and liquidity remain strong.

With that, I'll hand the call over to Jim to discuss our consolidated financial results in more detail.

Jim McKinney -- SVP and CFO

Thank you, Joe, and good afternoon. I'll start on page nine and review our consolidated third quarter results and then briefly touch on our life and health results. Overall we had a successful quarter. Net income was $92.2 million or $0.40 per share as reported up from $47.7 million or $0.92 per share last year.

On an adjusted basis, net income was up $131.7 million or $2.01 per share up from $62.7 million or $0.96 per share. Adjusted consolidated net operating income was up 135% to $105 million or $0.59 per share for the quarter compared to $44 million or $0.85 per share. On an as adjusted basis, adjusted consolidated net operating income was $144 million or $2.20 per share, up from $59.5 million or $0.91 per share.

Please note that on a reported basis, our rolling 12 months return on average shareholders equity was 9.7%, up from 5.7%. The significant improvement in this and the measures previously mentioned from last years third quarter resulted from improved underwriting results, a lower level of weather related losses, disciplined expense management and tax reform.

With the acquisition of Infinity, earned premiums increase 76% from last year or $455 million in the quarter to $1.1 billion on an as reported basis. On an adjusted basis, earned premiums increased 12% or $110 million. The increase in as adjusted earned premiums is largely due to continued market share gains occurring within our specialty auto business where underwriting margin exceeds target profitability ranges.

Book value per share excluding unrealized gains on fixed maturities end of the quarter at $45.22, up 26% from $35.87 last year. $7.67 or 82% of the increase was driven by the issuance of stock associated with the Infinity transaction. The remaining increase was due to net income earned over the previous 12 months, this represents roughly a 5% increase in book value.

On the bottom of the slide, you will note that, we continue to profitable grow our P&C policies in force while maintaining strong underlying loss and expense ratios. We have received a number of questions which suggest purchase accounting impact on the expense ratio in particular the value of business acquired VOBA is a confusing topic that has the potential to be misinterpreted. The number circled in red highlight the impact of purchase accounting adjustments. During the period purchase accounting had a 5.3 percentage point impact on the expense ratio.

Relative to VOBA purchase accounting requires you to take the projected earnings from the premium acquired for the remaining life of the current policy period and place it on the balance sheet as an asset. This asset is then amortized over the -- that period against the corresponding revenues. The net result is the creation of short term non-cash expense noise with no change to book value. Therefore, we recommend focusing on the as adjusted financials as this impact is temporary. It will affect our fourth quarter financials as well and then have a minimal impact on the quarter.

Moving onto page 10, here we isolate the key sources of volatility in our earnings in the highlighted section at the bottom of the page. You can see the underlying operating performance improved 33% or $0.35 per share for the quarter. This improvement is largely driven by strong growth in underwriting margin expansion within specialty auto. We are pleased with these results and look forward to continuing to grow our operating income and book value per share.

Our Life and Health Division results are on page 11 of the presentation. On the top half of the page. You can see the stable revenue trend earned premiums continue to show modest growth increasing $3 million to $158 million, while net operating income improved to $27 million. The life and health division overall continues to provide stable and diversified earnings in cash flows.

I'll now turn the call over to Duane to discuss the results of our P&C division.

Duane Sanders -- President, Property & Casualty Division

Thank you, Jim, and good afternoon everyone. I'll begin with a discussion on specialty auto on page 12 of our presentation. I will discuss this business on an as adjusted basis including Infinity's results in all prior periods. Earned premiums increased to $655 million for the quarter up $101 million or 18% over the third quarter of 2017. The top line growth was primarily fueled by higher volume as policies in force increased 15%.

More importantly this growth was achieved profitably as reflected by the strong underlying combined ratio. Specialty autos underlying combined ratio remained in the low 90s. The business generated attractive returns due to modest loss translate to rate actions, more scale and more scale than in the past. With a combination of Infinity, specialty auto is expected to further enhance the value we provide to all our stakeholders.

As you can see on page 13, our preferred auto business continues to show improvement, while our underwriting results remain below target profitability goals, we're seeing improved underwriting results with an over 1.5 point improvement in the underlying combined ratio. As we shared previously, we remained focused on improving this business and we're seeing early signs of our continued work efforts.

Turning your attention to homeowners, the underlying combined ratio was 91.7% about six percentage points higher than last year driven primarily by two items. We had a single large fire loss resulting from a lightning strike which was approximately 3 million, that contributed about five points and our seeded premium for our aggregate cattery contributed an additional three points to the loss ratio. We remained focused on all aspects of this business. Product Management underwriting and claims to bring it to an appropriate profitability level.

I'll now turn the call back to Jim.

Jim McKinney -- SVP and CFO

Thank you, Duane. Turning to investments on page 14. During the quarter, we largely completed the repositioning of the Infinity portfolio. The portfolio remains diversified and highly rated as demonstrated on the bottom left of the page. Here we've broken out the portfolio by investment type and provided the fixed maturity ratings.

The portfolio is conservative in nature with approximately 80% comprised of fixed maturities and short term securities and of those over 90% are investment grade. Looking at the chart on the upper left, you can see the investment performance over the past five quarters. This quarter we delivered $92 million in net investment income. The core portfolio produced higher net investment income primarily due to the addition of Infinity's investment portfolio. The alternative investment portfolio generated income of $13 million which is slightly out performed our expectations.

Overall in the third quarter, the portfolio delivered an attractive pre-tax equivalent annualized book yield of 5.2%. This is down from 5.8% last year primarily due to mix shift resulting from the addition of Infinity's portfolio.

On page 15, we highlight our strong capital and liquidity position. At the end of the third quarter, we had a debt to total capitalization ratio of 26.8% and expect to revert to the low-to-mid 20s within the next nine months. In the chart in the upper left hand corner, you can see our parent company liquidity. At quarter end, we had $91 million in cash and investments and $300 million in borrowings available from our revolver.

Looking at the chart in the upper right on page 15, you can see our insurance group remains well capitalized. If you look at the bottom left of the page, you can see that our businesses continue to generate substantial operating cash flows that are expected to grow over time.

With that, I'll turn the call back to Joe for some closing comments.

Joe Lacher -- President and Chief Executive Officer

Thanks, Jim. So, to wrap up the strong results this quarter are further evidence of the significant progress we've made in our transformation. The recent refresher our brand is another milestone in that journey. We continue to focus on effective execution of our strategy. Closing of the Infinity transaction solidifies our commitment to build strength in our core businesses and positions us as a leader in the specialty auto market. We've made tremendous progress on the integration and look forward to fully realizing the benefits of the powerful combined organization.

Now we'll turn the call back over to the operator to take your questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Greg Peters with Raymond James. Please go ahead.

Greg Peters -- Raymond James -- Analyst

Good afternoon. Thank you for the call. I wanted to circle back you know the growth you're reporting in auto and the improvement in the underlying combined ratio are noteworthy. I was wondering if you could give more color around post Infinity what states are going in and perhaps provide some perspective on the competitive environment in these states? And then I have a follow-up?

Joe Lacher -- President and Chief Executive Officer

Sure, Greg. This is Joe. And I'll take a crack at it starred in and ask Duane to tag team with me. We're seeing growth across most of the states we're in. The bigger states obviously a bigger dollar growth because they're bigger -- so California, Texas, Florida present the biggest dollars of growth, but the majority of states either company, we're in or actually seeing growth and we've got fairly attractive combined ratios in virtually all of the jurisdictions where we're doing business.

Jim McKinney -- SVP and CFO

Yeah, go ahead, Duane.

Duane Sanders -- President, Property & Casualty Division

I was just going to -- you know Joe is exactly right, you know we're continuing to find opportunities across most of the states where we're writing business, obviously in those states where we've got better penetration, we're continuing to get some acceleration behind it. But you know as Joe mentioned, we're you know -- we're writing more business in the states where we've got some good margin.

Greg Peters -- Raymond James -- Analyst

Great. And maybe -- as a follow up just to the environment on the auto side, we can talk for a second about homeowners. It's been getting a lot of attention in the marketplace in a number of other companies have reported an uptick in underlying loss costs. And I'm just curious what your experience is? What your view on the market is? And you know how you think that the line could improve over the next few (ph) years?

Jim McKinney -- SVP and CFO

We can -- you know as I stated in the early commentary, we continue to focus on that -- on that part of our business. We're certainly following the industry and looking at trends that is a much smaller portion of business that we have. We're not necessarily spread out as many as a competitors are so most of our stuff's a little more concentrated. And -- it's reasonably firm yet and we're in the middle of rolling out our new product offering and continuing to get rate.

We're not where we need to be, but again remain committed to it and continue to work that side of the business to get it work its profitable.

Joe Lacher -- President and Chief Executive Officer

The fact that there is still a little bit of hard market run in on that Greg gives us -- the comfort that -- we're going to continue to see folks working toward improving profitable which we will make it easier to make that happen.

Greg Peters -- Raymond James -- Analyst

Right. I guess -- thank you for slide nine and providing us a clarity on the expense ratio, just to circle back to final question I have just Jim I think you said the fourth quarter will see another blip in the expense ratio, but then beginning in the first quarter next year, things should begin to revert back to normal, is that the 20 to 21 range or could you see a drop a little that?

Jim McKinney -- SVP and CFO

Yeah. I want to be careful in terms of very specific commentary on our expense ratio other that to say I do anticipated to revert back to kind of the normal ranges that you've seen our combined businesses achieve together plus the synergy aspects that you would expect to kind of run through these numbers between now and over the next year and a half. That said, I would expect the impact to be specifically from a VOBA perspective about half of the impact that it was this quarter from a net income basis that was about 40 million. And so you know in one way to kind of think about next quarter would it be about half or what it is now that would be equivalent to what you've seen kind of in our S-4, as well as the 8-K that we put out in terms of you know what was going to happen from a VOBA (ph) amortization perspective.

Joe Lacher -- President and Chief Executive Officer

I have the benefit of not -- as of not being the accountant in the room. The VOBA piece seems to be and everybody tied up in their shorts. I'll give you the way I think about it. When we bought the business all of the enforced premium the profitability associated with that we had to put on a balance sheet that will amortize itself in through the expense line as those policy periods mature. So, some of them might have had a day left on their policy period, some of them might have had five months and 29 days if they were a six month policy, some of them might have had 364 days left they were 12 month policy and as those policy periods expire that VOBA goes away.

So, Infinity had a fair number of 12 month policies that a lot of six-month policies so that, that works its way down. So Jim gives you -- gave you that number that the first quarter was about 40, the second quarter will be about 20. So, you can watch itself working down. It just works off as those policies mature and renew. So, there is not rocket science around it. That's all it is. And then there's other stuff, we've got other intangibles and amortizing, but there are much more modest dollar amount and then you've got normal kicking around expense activity. That's really the egg through the snake you got to think about and it's just those policy periods finishing their term.

Greg Peters -- Raymond James -- Analyst

And just a follow on to that Joe. Is there going to be some of the restructuring or integration expense running through that expense ratio component or is that all carried below those line?

Jim McKinney -- SVP and CFO

Yeah. No, sorry, this is Jim. Big picture that all carry below line that's essentially where we had forecasted it and that is aligned with our policies. The key the way that we think about that is what's above line are those items that are specifically related to what's the kind of ongoing run rate of the business.

The unique kind of one-off things that would be in particular to how you bring the organization or other it would not necessarily be included inside our pricing allowance inside how we price the Infinity transaction, what we thought it was a fair deal being put in there, but it wouldn't be in the ongoing kind of segment results and whether or not that business is profitable or not from that perspective. And so we really try to segment where those expense line items fall by whether or not there's something that's kind of core to that business or if it's more strategic activity that the organization has taken.

Greg Peters -- Raymond James -- Analyst

Thank you for your answers.

Operator

Our next question comes from Adam Klauber with William Blair. Please go ahead.

Adam Klauber -- William Blair -- Analyst

Hi. Thanks. Good afternoon. Couple of different questions preferred auto showing good trend. Is there room to go in that line of business?

Joe Lacher -- President and Chief Executive Officer

In terms of room to go, I'm assuming you're talking about (inaudible)

Adam Klauber -- William Blair -- Analyst

Yeah, margin.

Joe Lacher -- President and Chief Executive Officer

Yeah we're -- right we're I'd say we're on the -- we're on the front end of that. We continue to push you know push the rate that we're able to get in. And again, I mentioned we're rolling out new product in all of our states through our new program. So, you know we continue to look for those opportunities and continue to try to -- to try to push that.

Adam Klauber -- William Blair -- Analyst

Okay. Thanks. Could you talk about loss trends specifically the non-standard. Are you seeing better frequency is that actually negative. And how severity is now compared to a year ago?

Duane Sanders -- President, Property & Casualty Division

It's Duane, frequency I'd say is -- is continued to remain close to flatterers certain covers there might be slight uptick, but buy and large it's -- it's fairly -- fairly flat. Severity again is -- severity again I think depending on cover has some movement in it. I would tell you that based on our mix of business and in terms of the covers that we write with the limits we've write, we probably see a little less than that which you might see and something on -- in the industry at large, but so there's some movement again manageable you know and we continue to watch it respond accordingly.

Jim McKinney -- SVP and CFO

(inaudible) comment a little bit Duane on the BI increases, because I want to make sure that we have a clarity on that one.

Duane Sanders -- President, Property & Casualty Division

Yeah. So, as Joe was pointed out on the -- on the specific covers there's a little bit on the BI side in terms of frequency movement. But again, you know, it's you know we continue to watch it and respond accordingly?

Adam Klauber -- William Blair -- Analyst

Thanks. And then on the technology have you made decision on the policy management system yet?

Duane Sanders -- President, Property & Casualty Division

We've largely had internally and I'm going to avoid commenting on it here just that I'm not positive what we communicated and where we are externally with vendors -- like and I'm not sure, I'm just not sure what this data is or whether we buttoned up on all of those negotiations. If they're not at the point where we think they are economically will change your mind.

Adam Klauber -- William Blair -- Analyst

Okay. Okay. And then from a capital standpoint, I mean, you're growing a lot and then obviously requires capital, but you're also generating capital. Do you see -- as you get into '19, '20. Do you get in the point where you generating excess capital? Or do you think you'll need your capital mainly to support your growth?

Duane Sanders -- President, Property & Casualty Division

I think I would bifurcate that into a couple of components. I think the first component is when we look out over the next kind of -- quarter to three quarters. We've talked about a prioritization to return to a more normalized level of debt to capital. So, I would suggest that our second priority other than making sure that we can have all the capital that we need to organically grow the business in a strategic footprint is there that's probably the number one thing assuming that we continue to grow at this pace or in margins, that I think you would see us kind of taking a look at where we're at kind of you know whether it be second, third, fourth and we would have additional commentary on that.

But my focus right now is really kind of over the next six to nine months and getting and maintaining the state that we have and then assuming that we do those things then we get to have some of the exciting discussions that you're talking about in terms of additional capital management or other items for us to think through.

Adam Klauber -- William Blair -- Analyst

Okay. Great. Thanks a lot.

Operator

Our next question comes from Bob Glasspiegel with Janney Montgomery Scott. Please go ahead.

Bob Glasspiegel -- Janney Montgomery Scott -- Analyst

Good afternoon, and thanks for the VOBA English translation, Joe. That was helpful. The October couple of hits from Michael in the financial markets any commentary and exposure there?

Joe Lacher -- President and Chief Executive Officer

Yeah, happy to comment. You know Michael you know first and foremost you know kind of our hearts go out to the people who has been impacted by that. We're doing everything that we can on our side where we have individuals impacted to make sure that we take all appropriate actions to do what we can there. From a financial perspective, right now it looks you know it's a reasonably small number for us. I would say consolidate on top of the house it appears to be a number that's below $10 million, and kind of with inside the expectations for what normal cat activity might be for us for the fourth quarter.

Bob Glasspiegel -- Janney Montgomery Scott -- Analyst

And just financial markets in alternatives any exposure to what happened in October?

Joe Lacher -- President and Chief Executive Officer

We're not seeing anything to speak up, there's -- noise on things, but nothing that we -- at this point describe is really know where they.

Bob Glasspiegel -- Janney Montgomery Scott -- Analyst

So, you avoided two Catastrophe, that's good to hear.

Joe Lacher -- President and Chief Executive Officer

It had to happen eventually, Bob.

Bob Glasspiegel -- Janney Montgomery Scott -- Analyst

Yeah, non-care whether in homeowners hit a few people you mentioned when lightning strike which maybe you could qualify is that, but you're not seeing a broader trend that some others have seen.

Joe Lacher -- President and Chief Executive Officer

No, we're not -- the one lightning strike was an -- a weird wacky item when we go through it from an underwriting perspective, we'd write the risk again every day and sometimes as an insurance guy, claims happen that doesn't trigger anything with us. And as we've found in other cases we have the modest sized book and it's just -- times we get popped a little more than the rest of the world because of some concentration issues and at times a little less and right now we're getting a little less.

Bob Glasspiegel -- Janney Montgomery Scott -- Analyst

Okay. Thank you, and continue good luck.

Joe Lacher -- President and Chief Executive Officer

Thanks, Bob.

Operator

Our next question comes from Paul Newsome with Sandler O'Neill. Please go ahead.

Paul Newsome -- Sandler O'Neill -- Analyst

Thanks. Congratulations on the quarter. I want to ask about the investment portfolio particularly its impact on the life insurance business. Are we close to a place on the interest rate side where we could see -- I guess less margin interest rates spread compression given the higher interest rates are we still a ways off from a portfolio return perspective for the life insurance business?

John Boschelli -- Senior Vice President and Chief Investment Officer

Hi, Paul. This is John Boschelli. How are you? Thanks for the question. The interest rate environment especially even in October has moved very nicely for us. And with that in mind the -- basically we have our cash that we're reinvesting and so that's can be a slow slog of reinvestment concepts, but if this reinvestment rate continues it should be a positive trend, but --

Joe Lacher -- President and Chief Executive Officer

Not (technical difficulty) but up is better than down, so moving back in the right direction.

Paul Newsome -- Sandler O'Neill -- Analyst

Is new money above the portfolio rate from your perspective?

Joe Lacher -- President and Chief Executive Officer

I mean it really depends, right Paul in terms of where things are coming off in general I would suggest that the portfolio is slightly higher than where new money rates are, but it's really dependent on which securities are maturing and which securities we're putting on. In general though, as John mentioned you know I think we're kind of at a baseline potentially you know the environment holds could be a slight favor, but I would expect and kind of think about it largely in terms of the results that we've -- we've kind of had today that are a pretty good baseline for where we'll be out for a little while.

Paul Newsome -- Sandler O'Neill -- Analyst

Great. And then could you just review where you are from a ratings perspective on the property, casualty side, you still taking rate across the border or -- particularly in auto?

Duane Sanders -- President, Property & Casualty Division

Yeah. This is Duane. Yeah, we are you know certainly you know work in that on a state-by-state basis. And you know we continue to look at you know evaluate loss costs in those drivers and you know general -- low levels of rape that we're continuing to push it.

Paul Newsome -- Sandler O'Neill -- Analyst

Great. Thank you very much.

Operator

(Operator Instructions) Our next question comes from Chris Campbell with KBW. Please go ahead.

Chris Campbell -- KBW -- Analyst

Hi, good afternoon gentlemen.

Joe Lacher -- President and Chief Executive Officer

Good afternoon, Chris.

Chris Campbell -- KBW -- Analyst

First question is on the $43 million legal benefit you guys left that in operating EPS or normally I'd consider that non-operating. So, I know that was kind of a partial settlement of a bigger legal issues, so I guess just how are you thinking about that going forward if there are subsequent settlements?

Jim McKinney -- SVP and CFO

Yeah, hi Chris, this is Jim McKinney. The way that I would think about it, you know the 36 million pre-tax we had about 28 million after tax is really a recovery against some of the impairments that we took several years ago, because of that and because of those impairments went through the operating results of that segment, the best performance of the segment over time and individually is to include those. Now we would recognize those essentially as kind of one time episodic issues, but when you think about the capital levels that are inside that business, when you think about the overall results and other items, the right place to put those in order to match both the expense both what it was previously and where it is today is to included in that line item.

Chris Campbell -- KBW -- Analyst

Okay. Got it. And then if you're thinking about --

Jim McKinney -- SVP and CFO

And the follow up -- Chris, the rest of that settlement there was one big settlement and this is a partial all the rest of it's going to follow the same path. That was the other side of your question.

Chris Campbell -- KBW -- Analyst

Okay. Got it. So -- (Multiple Speakers)

Jim McKinney -- SVP and CFO

That's not a -- this is an decision on how we'll do with any settlement ever. This is all following the one arbitration award that we want.

Chris Campbell -- KBW -- Analyst

Okay. Got it, because you ran it through operating earning or you were into operating earnings like with the impairments, so you're just running it back through because --

Jim McKinney -- SVP and CFO

Correct. It was written off years ago through there, so we're undoing that with the arbitration award.

Chris Campbell -- KBW -- Analyst

Got it, makes sense. Okay and then just kind of non-standard so that net earned premium like on an as adjusted basis and thanks for providing those very helpful to put the two businesses together. So, that was up 18%, but if I look at the as adjusted expense ratio that was actually up like 10 bps. So, I guess I'm just trying to think as you're putting these two businesses together does that mean there is no more expense synergies we're thinking about this at least on the nonstandard side. I mean it's running at 16 which is like an awesome expense ratio just trying to think how low that could go?

Joe Lacher -- President and Chief Executive Officer

Yeah, Chris, I want to be careful not to maybe touch on how low could it go or not. We are in line in achieving the synergies that we suggested and that we can pull out from an S-4 basis. Bigger picture wise, I think it's important not to get too confused in terms of what the 10 basis point increase is when you look at these things quarter-over-quarter, some of what's rolling through there is just a different policy that we have -- that just duct (ph) fewer expenses from that perspective that was over a point.

And so when you look at that line item there is a timing difference that you would see now over time that would be the same on us as there is as you get to a normalized state. But for the next few quarters for some period of time here you might see that 10 basis point, but that isn't about more expenses being earned that's just really a policy difference in terms of the Infinity versus kind of our own policy both of which are appropriate.

Chris Campbell -- KBW -- Analyst

Okay. Got it. And then just -- the software proceeds you guys have any plans for that? I mean are there a potential base could be used for buybacks?

Joe Lacher -- President and Chief Executive Officer

Again I'm going to point you to some of the comments that I made previously about capital. Our first priority is continuing to invest organically within the business and to look for options that would strategically enhance our operating profile and provide meaningful returns to shareholders. The second thing on that list is returning to a normalized debt level that we've indicated which is going to be low to mid-20s. So, we're looking at kind of the bank now, we look at the hybrid, we look at those instruments and what you can expect is that we're going to do what's in the optimal interest for shareholders from that perspective, post that we'll look at any kind of excess capital on that, that we may have relative to growth and opportunities.

And we'll be thoughtful about it -- in terms of if there is access and when we're unable to deploy that over some reasonable time we would think about returning that to the extent that there's opportunities that we can create significant shareholder value for our stakeholders. We would look to deploy it in ways that would allow us to do that.

Chris Campbell -- KBW -- Analyst

Okay. And then just a commercial auto another as adjusted kind of expense ratio question. So, the 23.6 that seems higher than both even Kemper was operating and I know like legacy, Infinity was kind of a better more efficient book at least on an -- expense ratio basis. So, I guess just should we think of -- now that the two commercial auto books are kind of merged together, it's going to look more like Kemper on the expense side or more like Infinity. And I mean are there any reclasses that are impacting the -- because there was also a 600 bps of core loss ratio -- improvement year-over-year. So, are there any reclassification happening between expenses and loss ratios that could be throwing off?

Joe Lacher -- President and Chief Executive Officer

So, there's a couple of things going on. I'll give you an overall comment and Jim will just going to follow us with a little detail. On the expense stuff, Chris, we have the same VOBA issue running through commercial vehicle the Infinity book was significantly larger than Kemper's. So, that's going to be the overwhelming driver of the performance of the results just when you do -- if you just start with a simple weighted average that's going to be a driver.

I would love to tell you on each and every one of these numbers there wasn't purchase accounting noise or other items in them. And I wish they weren't there, but they just wind up needing to be in this quarter. We were trying with the S-4 and the 8-K to put some detail out there in advance to sort of preview where those were coming. The fact that the Infinity business was performing better than we had expected at the time of the transaction actually increases the VOBA and increases this and that's a great first world problem to have because that means the business is performing extraordinarily well and better than we all expected.

But it creates a quirky little piece of noise in the expense ratio. It's going to be hard for you to pick this quarter's expense numbers on a line-by-line basis and use those in and of themselves as a basis for building models going forward you're just going to get the wrong answer doing it that way. I think you've got to step back and look at some of the S4 from a projection set of items to give you some guidance and can use some reasonable view of some premium weighting of each of the two organizations historical size, if Infinity was 75% of the business and Kemper was 25% that's a reasonable weight and then use the overall synergy number to adjust.

If when you add up your model, you're getting some difference than the overall synergy number, you made a mistake like that, that's got to be the bias where that's I think the best math overall we can give you and I'll let Jim clean up whatever the non accounting just said.

Jim McKinney -- SVP and CFO

Chris, you know just -- I'd point to what I said earlier about having a little bit of a difference in terms of the DAC, you know you've got kind of a point or two that essentially kind of -- you just wouldn't normally have in there it'll take a little bit of time for that to normalize. Long term, I would expect that really the Infinity book of business and the historical expense ratio is where I would expect it to trend. And there's not going to be a significant time period really before we probably where you kind of see that play out in greater degree. So, maybe remainder of this kind of quarter first half of next year I would expect you to get to more of a normalized number.

Chris Campbell -- KBW -- Analyst

Okay. Well, great, thanks for the answer. That's a lot for the rest of the year.

Joe Lacher -- President and Chief Executive Officer

Thanks, Chris.

Operator

Our next question comes from Marc Cohen with Guggenheim Partners. Please go ahead.

Marc Cohen -- Guggenheim Partners -- Analyst

Good afternoon, gentlemen thank you for taking my call. Joe just a follow up on that capital indication in respect to returning to debt-to-capital over the next six to nine months. Would that be the liability management initiatives or through the retention of earnings and growth of equity capital?

Joe Lacher -- President and Chief Executive Officer

I think it's largely the latter we're expecting to grow the business and throw off earnings inside of the place or the business right now is growing at a particularly high rate which is again a very first world problem to have which is terrific or organically growing the business and that the plus. So, we expect to deal with that. And then we've committed to rating agencies that will reduce that debt-to-capital load going forward.

Jim McKinney -- SVP and CFO

Just a follow up. One item that I would just add to that and you've seen this is a part of our S-4 and some of the other items. We had projected when we are bringing both Infinity and ourselves together that we would be using some of the excess capital that was inside Infinity to bring that level back to normalized state that we expect to happen kind of in the fourth quarter first quarter kind of -- the timing of an extraordinary dividend. And then from there forward it would be as Joe mentioned the additional retained earnings and other items that would bring us back to our normalized state. It's really those two activities that lead us there.

Marc Cohen -- Guggenheim Partners -- Analyst

Great. I guess that's a great preamble to my next question. As of September 30, I think the holding company had about $19 million of cash or unrestricted capital at the holding company level. Is there a specific target of unrestricted capital at the holding company level you plan on maintaining to cover fixed charges and corporate expenses?

And then a follow-up to that based on your three or four operating insurance companies, can you discuss what the dividend capacity is following the transaction that would be ordinary dividends that would be upstream from those entities to the holding company.

Joe Lacher -- President and Chief Executive Officer

Great. Lot of questions there. Let me try to pick them off one at a time and if I missed something it's not intentional, please just let me know that I missed it and we'll answer it. Big picture wise -- hold on one second -- yeah, great -- in terms of the target, generally speaking and what we've talked about with the market is that we intend to hold one year of operating cash flows different things at the Holdco in terms of our overall liquidity. That is obviously there to handle periods of stress or other or -- plan growth that we would then quickly follow-up and bring ourselves back to kind of normalized levels that we don't specifically put a target out there absent that we do have those internally. They do include other economic considerations and whatnot that we manage appropriately.

In terms of the capacity that would be ordinary we've got about $16 million more in terms of the Infinity component. We've got about $20 million more in Trinity, and then we have the extraordinary dividend coming out that we've chatted about as it relates to Infinity that would go to the bank no loan repayment of $150 million.

Marc Cohen -- Guggenheim Partners -- Analyst

And would that be a 2018 event or 2019 event on that extraordinary dividend from Infinity?

Jim McKinney -- SVP and CFO

Generally speaking, I would expect it to be a 2018 event, but again we -- these things are dynamic to some extent and that we're always ensuring that we're doing the right things for the business.

Marc Cohen -- Guggenheim Partners -- Analyst

Thank you

Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Joe Lacher for any closing remarks.

Joe Lacher -- President and Chief Executive Officer

Thanks operator, and thanks everybody on the call today for your time and your interest in Kemper. We look forward to updating you again next quarter. Have a great night.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 49 minutes

Call participants:

Michael Marinaccio -- Investor Relations

Joe Lacher -- President and Chief Executive Officer

Jim McKinney -- SVP and CFO

Duane Sanders -- President, Property & Casualty Division

Greg Peters -- Raymond James -- Analyst

Adam Klauber -- William Blair -- Analyst

Bob Glasspiegel -- Janney Montgomery Scott -- Analyst

Paul Newsome -- Sandler O'Neill -- Analyst

John Boschelli -- Senior Vice President and Chief Investment Officer

Chris Campbell -- KBW -- Analyst

Marc Cohen -- Guggenheim Partners -- Analyst

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