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Kemper Corp  (NYSE:KMPR)
Q1 2019 Earnings Call
April 29, 2019, 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 First Quarter 2019 Earnings Conference Call. My name is Andrew, and I will be your coordinator today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, the conference call 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 A. Marinaccio -- Vice President, Corporate Development and Investor Relations

Thank you, Andrew. Good afternoon everyone and welcome to Kemper's discussion of our first quarter 2019 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 Senior Vice President and the Property & Casualty Division President.

We'll make a few opening remarks, provide context around our first quarter results and then we'll open up the call for questions-and-answers 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 Senior Vice President and Life & Health Division President.

Before the markets opened this morning, we issued our earnings release and published our first quarter earnings presentation 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 at kemper.com.

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 2018 Form 10-K, as well as our first quarter 2019 Form 10-Q and the earnings release.

This afternoon's discussion also includes non-GAAP financial measures that we believe are meaningful to investors. One such measure that I want to highlight is, again is, as adjusted for acquisition. It is clearly important to understand our reported results, including the impact of the Infinity acquisition has to Kemper overall. However, investors have also expressed an interest in understanding the underlying organic performance of the combined businesses.

Since, our reported financials don't include Infinity's historical information prior to the closing of the acquisition, and our current results include the impact of purchase accounting, the underlying trends are not easily visible. In an effort to provide insight into the underlying performance we also provide our financial as adjusted for the acquisition. This removes the impact of purchase accounting and includes historical Infinity information to more easily provide a meaningful year-over-year comparison.

In our financial supplement, presentation and our earnings release, we have defined and reconciled all the non-GAAP financial measures to GAAP where required in accordance with SEC rules. You can find each of these documents in the Investor section of our website at kemper.com. Finally all comparative references will be to the corresponding 2018 period unless otherwise stated.

I'll now turn the call over to Joe.

Joseph P. Lacher -- President & Chief Executive Officer

Thank you, Mike. Good afternoon everyone and thank you for joining us on today's call. I'm pleased to announce that we delivered another quarter of strong performance. The intrinsic value of our business continues to grow. We remain committed to our portfolio specialized businesses which focus on growing niche in underserved markets. The superior growth we are delivering shows that our customers see and appreciate the value we're creating for them.

Our strong earnings and financial outperformance combined with this growth demonstrates the value we're creating for our shareholders. Our strong balance sheet reinforces our ability to continue to deliver on our promises into the future. All of this is fueled by an increasingly dynamic culture where employees are learning, growing and delivering great results.

On page 5, we're pleased to report that we have exceeded or are ahead of schedule on every financial target we announced at the time of the Infinity transaction and via the S-4. Written premiums are more than $150 million above those targets. Our yield enhancement is 20% above the high end of the range. Our debt-to-capital ratio is below 22% earlier than projected. Last quarter, we raised our cost savings target to $70 million to $75 million and approximately 60% of that revised number has been realized.

We have a mid-teens operating earnings accretion and partway through year one we're -- and partway through year one, we are already exceeding our ROE and ROATCE year two targets. Probably the most significant statistic is the tangible book value earn back. It's accretive after three quarters. That's less than half the two years initially projected. Don't forget that measurement has no but for us. It includes integration costs, the improving quality of the balance sheet and the core underlying profitability of the business, it's all inclusive. The acquisition has been and continues to be an out of the park financial success.

Now let's turn to page 6, and review the highlights of the first quarter. Overall, we generated double-digit organic growth and significant margin improvement, while maintaining a strong balance sheet. We continue to create shareholder value as just demonstrated by our 28% increase in book value per share and 30% increase in book value per share excluding unrealized gains on our fixed maturities.

Looking at our return on average equity excluding unrealized gains on our fixed maturities, we produced an 11.4% return. We're pleased with the significant improvement this represents from historical performance. As stated, we delivered strong improvements in the underlying fundamentals of our business. Earnings per share increased 130% to $2.35 per share, while adjusted consolidated net operating income per share increased 36% to $1.50. Earned premiums grew 76% on a reported basis, 12% on an as adjusted basis and 15% as adjusted within our Specialty P&C segment. In addition to 15% growth, we achieved significant improvement in our Specialty P&C segments operating performance. The underlying combined ratio improved almost 2 points to 91.7% as reported and 260 basis points to 92.1% on an as adjusted basis. Both the Preferred P&C and the Life & Health segments continue to demonstrate improvement. The Preferred P&C segments underlying combined ratio remained in the mid '90s or managing down of catastrophe exposure. The Life & Health segments benefits ratio remained within an normal range of volatility, while expenses returned to normalized historical levels.

From a financial strength standpoint, we maintained over $600 million of available and contingent liquidity, this coupled with our strong debt to capital ratio of 21.5% provides us with significant financial flexibility.

I'll briefly mention one more item, before I hand the call over to Jim. On April 25th, we received an additional $20 million payment from CSC in connection with the judgment in the software dispute. The remaining balance of this award is currently on appeal.

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

James J. McKinney -- Senior Vice President & Chief Financial Officer

Thank you, Joe, and good afternoon to everyone on the call. Let's turn to page 7 to discuss the first quarter financial results. As Joe mentioned, we had a great start to the year. We generated strong top line growth while growing profits and returns. Earned premiums increased to $1.1 billion. On an as reported basis, this represents a 76% increase over the prior year quarter driven by organic growth from each of our businesses and our acquisition of Infinity. On an as adjusted basis, earned premiums increased 12%, the result of a 10% increase in policies in-force within our Specialty P&C business segment and a mixture of rate and volume increases from both the Preferred P&C and the Life & Health segments.

Turning our focus to net income. Organic growth, ongoing improvements in underwriting performance and our Infinity acquisition led to robust growth in net income, net income per share and adjusted consolidating net operating income per share. Net income for the quarter totaled $155 million, up $101 million from the prior year quarter. Net income per share on a reported basis increased from $1.02 to $2.35. On an adjusted basis, net income per share increased 105% to $2.32. Adjusted consolidated net operating income per share on a reported basis increased from $1.10 to $1.50. On an as adjusted basis adjusted consolidated net operating income per share increased 18% to $1.46. These results led to strong growth in book value per share and book value per share excluding unrealized gains on fixed maturities.

Moving on to page 8. Here we isolate the key sources of volatility in our earnings. Adjustment for the underlying operating performance improved 43% or $0.44 per share for the quarter. This improvement is driven by continued strong growth in underwriting margin expansion within our Specialty P&C segment, steady profits from our Life & Health division and our continued efforts to reposition the Preferred P&C franchise.

With that, I'll now turn the call over to Duane to discuss the results of our P&C segments.

Duane Sanders -- Senior Vice President & President, Property & Casualty Division

Thank you, Jim, and good afternoon everyone. Earlier, Joe hit on the fact that the Infinity acquisition is achieving or exceeding all financial targets, which is a credit to both organizations and an outcome from harmonizing the operations focusing on what's important, leveraging key capabilities and a consistent effort to becoming one. These efforts, along with many others, has yielded us a successful first quarter.

Now turning to page 9, I'll discuss our Specialty P&C Insurance segment. As with the prior two quarters, I will review this business on an as adjusted basis including Infinity results in all prior periods. Earned premiums increased to $729 million for the quarter, up 15% over the first quarter of 2018. The top line growth was primarily fueled by the value our products provide to policyholders, resulting in higher premium volume as policies in-force increased 10%. This continued double-digit growth demonstrates Kemper's leading competitive position within the Specialty Auto market.

Not only have we generate strong growth in meaningful market share gains, we simultaneously produced an improving underlying combined ratio. The segment's underlying combined ratio decreased over 2.5 points for the quarter due to an improving loss ratio and scaled benefits, resulting from continued volume increases. We remain focused on further strengthening our capabilities, delivering value to our customers in generating disciplined profitable growth.

On page 10, you will see the results of a Preferred P&C Insurance segment. Earned premiums increased to $186 million for the quarter, up 5% over the first quarter of 2018, largely the result of the continued expansion of our new auto product, which provides improved segmentation. The underlying combined ratio increase for the quarter related to our homeowners business driven by some above normal large loss activity. The Preferred auto business continues to show improvement. Policies in-force grew up -- grew by over 5% for the quarter due to the product expansion, underwriting results improved as demonstrated by over 0.5 point improvement in the underlying loss ratio and an expense ratio relatively in line with that of the first quarter of 2018.

We remain focused on further improving this business through additional product and claims management to bring results to our target profitability goals.

Turning your attention to the homeowners and others business, the underlying combined ratio was just under 90%, about 2.5% points higher than last year, primarily as a result of an abnormal number of large losses as mentioned earlier. Our policies in-force decreased about 5%, not unexpected as we continue to diversify our catastrophe exposure through pricing and underwriting actions. Long-term, our position on this business has not changed and we still expect to bring it to appropriate profitability -- profitability through rate, product and claims actions.

I'll now turn the call back to Jim.

James J. McKinney -- Senior Vice President & Chief Financial Officer

Thank you Duane. Our Life & Health divisions results on page 11 of the presentation. The teams continued focus on agency management and process improvement resulted in earned premium growth of over 3%. In the fourth quarter of 2018, we had an increase in incurred expenses and noted at the time that the majority were related to one-time items tied to volume and non-run rate business investments expected to enhance long-term profitability. This quarter, the level of insurance expense returned back in line with our historical trend. In addition, the benefit expense ratio remained within a normal range of volatility versus the elevated level experienced during the first quarter of 2018 due to the severe flu season.

Turning to investments on page 12. Our portfolio remains diversified and highly rated as demonstrated on the bottom left of the page. Looking at the chart in the upper left, you can see the investment performance over the past five quarters. This quarter, we delivered $83 million in net investment income. The core portfolio produced higher net investment income, largely due to the addition of Infinity's investment portfolio. The alternative investment portfolio generated a loss of $1 million mainly the result of the underperformance of three funds. We consider this an episodic event that is not indicative of broader market theme or a portfolio underwriting deficiency. Overall, the portfolio delivered a pre-tax equivalent annualized book yield of 4.2%. This is down from 5% due to the asset mix shift driven by the addition of Infinity and the previously discussed decrease in alternative net investment income .

On page 13, we highlight our strong capital and liquidity position. In the first quarter, operating cash flows increased $15 million to $89 million compared to the first quarter of last year. The increase was a result of increased scale and disciplined operational and financial management. Turning our attention to the chart in the upper right of page 13. You can see that all of our insurance groups remain well capitalized. In the upper left hand corner chart, we present our parent company liquidity. At quarter end, we had substantial financial flexibility with $119 million in cash and investments and $490 million in borrowings available from our revolver and our subsidiaries. Finally, our debt to capital ratio was 21.5%, providing us with significant financial flexibility.

On page 14, I would like to quickly touch on our operating leverage program. This program provides us access to collateralized advances which we can in turn invest in high-quality assets to enhance net investment income on a risk adjusted basis. In addition, it enhances our ability to deploy float and take advantage of market inefficiencies. When utilized in this fashion, the borrowings would not be classified as debt from either an accounting, or rating agency standpoint and therefore would not impact our debt-to-capital ratio, reduce borrowing capacity, change our fixed cost structure, or impact our working capital. Overall, this provides further evidence that we are disciplined operators looking for every opportunity to create value for our shareholders, customers and employees.

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

Joseph P. Lacher -- President & Chief Executive Officer

Thanks, Jim. In conclusion, this quarter's strong operating results continue to demonstrate the power of our platform and the great progress we're making on building the strength of our franchise. Our teams collective effort and dedication resulted in another quarter of top-tier premium growth and profitability in our Specialty auto business with consistently stable earnings in our Life & Health businesses and improving results in our Preferred P&C lines. We remain committed to strengthening our core capabilities, maintaining our specialized market focus and delivering outstanding value for our customers and our shareholders.

With that, I'll turn the call back over to the operator to take your questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Matthew Carletti of JMP Securities. Please go ahead.

Matthew Carletti -- JMP Securities -- Analyst

Hey, thanks. Good morning. Or I guess good afternoon, sorry. I just have a few questions. In Specialty P&C, the margins have improved quite substantially. At this point, would you view these as kind of the 92% underlying combined ratio as target margins and so you'd look to maximize growth at that level? Or do you think that the run rate, profitability of that segment could be improved from here?

Joseph P. Lacher -- President & Chief Executive Officer

Yes, Matt. We -- this is Joe. Thanks for the question. We don't provide targets. We do indicate that we're targeting a low-teens ROE. I think it would be hard to do math on the 92% and come to -- not come to the conclusion that it was better than low double-digit ROE. And maybe I said low-teens, I mean low double-digit ROE. It will be hard to come to the inclusion that it wasn't exceeding that. Trying to project where it goes over the next quarter or two, we're going to try to avoid doing that. I think we're at a point where if you did that math and conclude it, we were better than that low double-digit ROE, we would be looking to grow as much as we can, and that's all going to come a function of local market issues and what our competition is doing and how we're fitting. But at a 92%, we're definitely looking for more growth rather than margin expansion.

Matthew Carletti -- JMP Securities -- Analyst

Okay. Great. And then shifting to Preferred, kind of a similar question. I know you're not giving a target. How should we think about that in terms of where the improvement could go, and then the kind of the timeline by which you think you could achieve whatever the target margins for that segment might be. And would you expect that when everything's running how you want it there kind of the targeted return on capital for that business is similar to Specialty or would you expect that the Specialty is a higher return business?

Joseph P. Lacher -- President & Chief Executive Officer

So, let me give you a couple of thoughts and then, Jim and Duane can jump in and add if they want to if I'm missing something. First, and we've talked about this before. (Technical Difficulty) margin improves generally slower than Specialty auto. You typically have 12 month policies, regulators tend to be a little more sensitive to write and underwriting changes and action changes in those businesses. Typically when you have a temperature in Specialty auto, there's a perception that the customer caused the problem. So the business tends to be a little more responsive. Each of the businesses, whether it's Specialty auto, Preferred auto or Preferred home, has a different amount of required capital. So they get different, different hurdles there in terms of what they're doing.

The -- if you were to point back and maybe look at schedule P, and look at the triangles and sort of the underlying numbers, you'd see a slow and steady improvement in this underlying business. There's been some CAD volatility in homeowners, but you'd see a very reasonable profit improvement over the last three or four years inside of that business. I think there's still some work to do there, but the auto is getting closed, the homeowners has a little bit further to go.

Matthew Carletti -- JMP Securities -- Analyst

Okay. Great. And then just one more question come away from the operating (Multiple Speakers).

James J. McKinney -- Senior Vice President & Chief Financial Officer

Matt, I would just add to Joe's comments. You can further kind of take a look at some of the triangles that are available from a Preferred standpoint or the personal insurance standpoint. I think what you'll see is if you go back to 2016 and prior, the totality of the position that we stepped into at that point in time was roughly 10 points worse than where we're at or where we had projected at that point in time. You can see that both from the paid development as well as kind of the incurred that have come through from there, and so as we've been forecasting and making our adjustments, both from a rate mix, you're seeing what appears on the surface to be relatively flat, but in reality we improved the underlying profitability of that business by over 10 points today. And we continue to kind of make meaningful progress against that and as you've seen and can see from those triangles both in terms of the Schedule P that Joe is referencing, as well as the triangles available in the K.

If you look at the recent years, if anything, you've seen a -- you've seen slight favorable development there. It was deeper than we thought it was.

Matthew Carletti -- JMP Securities -- Analyst

Got you. And then last a quick one. Just, you put in the appendix kind of an update on the 2019 reinsurance program. Can you just help us ballpark kind of both the CAT program and the aggregate program, kind of how pricing change now we should think that fall into the model?

Joseph P. Lacher -- President & Chief Executive Officer

Yes. I mean, big picture wise, the CAT pricing changed in a non-material way. You're going to see maybe a $2 million in totality. From a premium perspective, that will come out over the year. In general it was a pretty favorable place for us to be.

Matthew Carletti -- JMP Securities -- Analyst

Great. Thank you for the answers and best of luck going forward.

Operator

The next question comes from Gary Ransom of Dowling & Partners. Please go ahead.

Gary Ransom -- Dowling & Partners -- Analyst

Yes. Good afternoon. I had a question on the opportunity to -- for growth and I guess I'm thinking that the environment is a little bit more stable in terms of pricing now, and that that compared to where we were for the last two or three years that might mean there is a little less shopping going on. I was wondering if you just help me understand how that might be changing or whether that makes it more challenging to grow or whether there's other things going on that I'm missing there?

Joseph P. Lacher -- President & Chief Executive Officer

So, Duane and I'll tag team in this one. I assume you're principally, Gary, talking about the P&C business and maybe the Specialty auto, most principally.

Gary Ransom -- Dowling & Partners -- Analyst

Yes. I'm probably talking about Specialty auto mostly, yes.

Joseph P. Lacher -- President & Chief Executive Officer

Okay. We're still seeing fairly attractive growth in there. It's down from what we saw last year which was really, really high, now it's just great. But we're finding our products are competitive, and there is a regular set of shopping that goes on with Specialty auto customers partly, because they tend to have just a higher premium outlay in general. So, they are a little more price sensitive. And then, we're exploring opportunities not just in one or two urban zones, but we're also looking to expand the business.

Duane Sanders -- Senior Vice President & President, Property & Casualty Division

Yes, and I -- this is Duane. Gary, I would echo Joe's comments and say, by and large the nature of those insureds have a tendency to kind of price shop regardless to where they are, even though you might find it to be more stable and with the competitive pressures and competition making changes, there is some movement out there. And so, that alone will get them -- put them back in the marketplace and then to Joe's point where we are, kind of spreading our reach into other areas, allows us to continue to try to gain share in different geographies.

Joseph P. Lacher -- President & Chief Executive Officer

We might expect there to be pressure. The premise of your your question, Gary, I think was that if people aren't being disruptive with rate action, there won't be as many shoppers.

Gary Ransom -- Dowling & Partners -- Analyst

Yes. That's -- you're correct.

Joseph P. Lacher -- President & Chief Executive Officer

We actually, we worry more about the growth if we started to see people being disruptive by having a sale. And that will cause some temporary contraction and then usually that results in them jacking their prices up later on when they realize it was a sale and it was ill-advised.

Gary Ransom -- Dowling & Partners -- Analyst

Right. Do you see it at all in the -- on the Preferred side is that different in that market?

Joseph P. Lacher -- President & Chief Executive Officer

I -- we're going to be tagging in this one. I've always seen it a little bit different in the Preferred side of the house. We got a more modest sized book there and we're in some specialized geographies and working with our package program. So we don't see quite as much of volatility there. I'm not sure if you're looking for a comment more broadly across the entire market.

Gary Ransom -- Dowling & Partners -- Analyst

No, that's fine. I think that the Specialty comment is most helpful. Maybe a way of saying it is, there is not -- there's always a lot of churn going on. No one (inaudible) of people sitting back and...

Joseph P. Lacher -- President & Chief Executive Officer

You see more churn in a preferred market when somebody is -- when it's harder or soft market, you tend to see prices moving and triggering more shopping behavior in the Preferred environment, there is generally a high degree of shopping behavior in the Specialty market all the time.

Gary Ransom -- Dowling & Partners -- Analyst

All right. Yes. Okay. That's helpful. Just on another subject to I'm thinking back, you've talked about claims leakage, a little bit as you brought the two companies together, and I think -- and I may -- I think you have made a lot of progress and maybe you've tightened that all. But I just wondered if you could tell us where you stand in that whole claims process. Is everything where you want it to be with the joining of the two companies?

Joseph P. Lacher -- President & Chief Executive Officer

Yes. Gary, I think what we were describing was that when you put two organizations together, and you've got two different hiring processes, two different possibly career pass, two different training processes, the supervisor spans of control two different systems, all of the nitty-gritty stuff with our claim departments operate, when you're putting those together for some period of time people -- in addition to serving the customers in dealing with individual claims some part of the bandwidth of the organization is spent figuring out a combine those. Typically when that happens, you would expect that there might be some increase in claim leakage.

We're always doing a great job of serving our customers. We're always doing a great job paying what we owe. Sometimes if the car winds up in a body shop one day longer and there's more storage fee or there is another day of rental expense. So, there's operational items that might occur, that might push those dollars up a little bit. They occur.

I don't know if we know exactly whether we've pulled that merger related leakage out. I know we've got a pretty attractive combined ratios right now. I know we will look to make sure that's fully out over the next 12 months. And I know when you combine it with the -- effectively the margin question that Matt was asking, we would expect that to the extent there is something there, we would be thinking about that in terms of the pricing be more competitive rather than seeing intentionally margins getting better.

Gary Ransom -- Dowling & Partners -- Analyst

All right.

Duane Sanders -- Senior Vice President & President, Property & Casualty Division

Yes. The only other thing, Gary, this is Duane. I would say is, to all the things that Joe mentioned is, you've also got -- when you bring the organizations together, you've got process, procedures and I'll call vendor relationships and those vast and varied. So when you harmonize those, you just -- it takes a little time to work through those and as we continue to do that, then we'll -- as Joe said, we look at pay and what we owe and doing it's the best of our ability and most efficient effective way possible. And to the extent we can continue to work that process, we will.

Joseph P. Lacher -- President & Chief Executive Officer

We don't anticipate being on one claim system, Duane, until end of the year.

Duane Sanders -- Senior Vice President & President, Property & Casualty Division

Yes. If we are not on one claim system until the end of the year, we can't be under surely one set of processes. Our hope would be that once we're on one system and one set of processes, we can actually advance the ball a little further, but that's going to be a 2020 prospect just from the accounts. Or I mean we would have described to you all before when we talk about systems coming together.

Gary Ransom -- Dowling & Partners -- Analyst

All right. That's very helpful. Thank you very much.

Operator

The next question comes from Paul Newsome of Sandler O'Neill. Please go ahead.

Paul Newsome -- Sandler O'Neill -- Analyst

Good morning. Congrats -- or good afternoon. Congrats on the call -- on the quarter. Just almost a follow-up, and I apologize if you touched on this and I missed, I've to jump out real quick. But wanted to know if there was anything unusual in the reserve development that cheered up this quarter, it looked like it was a little bit more favorable than I expected, not a bad thing. But just -- is there anything in there that would be different or abnormal this quarter?

James J. McKinney -- Senior Vice President & Chief Financial Officer

Yes, no, differences, Paul. This is Jim. In terms of our -- the methodology, the application that we're applying, nothing significant stands out. Just continues to be favorable underlying trends within the business and the net result of that was favorable development during the quarter.

Paul Newsome -- Sandler O'Neill -- Analyst

Okay. That's good to know. And that was really all I wanted to ask. Thanks.

James J. McKinney -- Senior Vice President & Chief Financial Officer

Thanks, Paul.

Operator

(Operator Instructions) The next question comes from Adam Klauber of William Blair. Please go ahead.

Adam Klauber -- William Blair & Company -- Analyst

Thanks. Good afternoon guys. As far as capital usage, I know you like organic and a few deals out there, you like deals also. But with the leverage coming down if the first two don't pop-up, do buybacks become consideration this year?

Joseph P. Lacher -- President & Chief Executive Officer

Yes, Adam. And I'm going to go back to -- I know, you started the question this way, but I'm going to go back to it this way. Our first priority is to focus on growing this business. We think we've done a nice job building a model that does a good job for customers and shareholders. Our first priority is going to be organic growth when there are opportunities out there, like the Infinity acquisition or something similar, we'll explore those, and when we don't over a foreseeable time horizon, have the opportunity to grow the business, we will look at ways to explore returning capital to shareholders. I think we've talked about there's a variety of ways we can do that and we'll sort of regularly look at what's the most appropriate session an opportunistic way to do that to get the best return for the shareholders in that return.

Adam Klauber -- William Blair & Company -- Analyst

Okay, thanks. And as far as I think you mentioned there were couple of alternative investments that turned to great during the quarter. Could you add some extra color on that? And do you -- I think you maybe said it's probably one-off, so you don't expect that to recur in the next couple of quarters?

James J. McKinney -- Senior Vice President & Chief Financial Officer

Yes. No, thanks, Adam. This is Jim. That's exactly right. We look at them as being more related to episodic events. The reason for that is, you get a little bit more volatility when you have end of life investments. You have a quarter like the fourth quarter where the volatility within the market and other changes, some of the discount rates associated with some of those end of life investments, and the net result is what kind of a change or a short-term to medium-term or permanent change in terms of how those assets will change or trade. It's not something more indicative of the broader portfolio, really just the reality of where we're at on a couple of end of life assets and their impact in terms of the totality of our alternative investment income for the quarter.

Adam Klauber -- William Blair & Company -- Analyst

Okay. And then could you give us some color on that operating leverage program. Just give us an idea what that is and I don't know if you can -- is that going to start pumping up investment income in the near term?

James J. McKinney -- Senior Vice President & Chief Financial Officer

So Adam, you came in and out with your question. Or at least in terms of what we heard. So I'm going to try to answer the question the best that I can, and if I haven't just let me know, and we'll try to dive deeper. I would look at the operating leverage program that we've initiated or initiated in greater detail here in the quarter is something that I would not expect to have a material impact on our future earnings or our strategy in terms of what we're doing from a business perspective. The result of what we have deployed so far potentially increases run rate income by $1 million to $2 million. That's not something that I would otherwise normally highlight from a run rate perspective, other than it's a larger item when you look at the balance sheet that looks a little wonky if you don't have context to it.

In terms of the strategy pieces that it gives us, it helps create efficiency. You have timing elements that come in from a flow perspective, and you obviously have differences in terms of when assets are available. By having this program, it gives us an additional capability to appropriately match those timing differences and to take advantage of that. So, I think you'll have small incremental increase in the overall margin of the company as we go forward and the big opportunity that I think is there is, just further matching of assets and liabilities as we continue to kind of move forward in the business.

Adam Klauber -- William Blair & Company -- Analyst

Okay. And then as far as the auto business, I mean loss ratio was very good. Could you talk about from a seasonality what -- which quarters do you think will have typically free -- your book of business have a better versus loss -- worse loss ratio?

Duane Sanders -- Senior Vice President & President, Property & Casualty Division

Yes. And this is Duane. I -- if you look historically, actually if you look at the industry, it's normally the fourth quarter miles driven in weather will create potentially some run on that. If I look at our book, maybe it's geography things of that nature and the pick we use is an annual pick, but by-and-large, if you just look at industry, you'll probably find that to be at the end of the year.

Adam Klauber -- William Blair & Company -- Analyst

Okay. Thanks a lot.

Operator

The next question comes from Christopher Campbell...

James J. McKinney -- Senior Vice President & Chief Financial Officer

Hey, Adam. Just If I could add just a little bit of color on that. Big picture to the last quarter, I think you asked the question in terms of what would be a reasonable proxy to begin to think about how to estimate it? I'd point you back to the answers that we gave last quarter for that. If you looked at the kind of a four or five quarter average and applied a little bit of trending to the most recent, I think you'll get a pretty close approximation, kind of the underlying trends and what we're seeing, which again as Duane highlighted is included in the annual pic that we have and we put out there at this time. But I think those two things will merge pretty close and give you a reasonable bandwidth in order to project underlying income for the company.

Operator

The next question comes from Christopher Campbell of KBW. Please go ahead.

Christopher Campbell -- Keefe, Bruyette, & Woods, Inc -- Analyst

Yes. Hi. My first question is on the reserve releases. I guess, that's the most that we've seen since at least 2014. So I guess what accident years and lines are you seeing the redundancies emerging in?

Joseph P. Lacher -- President & Chief Executive Officer

So a couple of thoughts for you Chris. And Jim and I will tag team this one. I'm not sure was that the biggest in that time period, but maybe I'll offer a thought. At some point as we're -- when we're thinking about our loss picks, we're always looking to be picking management's best estimate by definition. But in any given point in time, we look at when there is periods of either greater disruption or less disruption, and we did have some period of time between some fairly high growth and some other items that were somewhat disruptive to the organization that might have caused us to think about this with a little wider aerobar and as a time of all that tightens up a little bit.

So I wouldn't -- I wouldn't immediately start seeing this as Jim mentioned earlier a fundamental change in how we're doing things. There's just some level of timing issue around pieces of it.

James J. McKinney -- Senior Vice President & Chief Financial Officer

Yes. I would agree. This is Jim, with Joe's comments there. In terms of some of the specifics, we're looking at we've seen a little bit of pressure maybe a $1 million, $1.5 million, when you look at unfavorable developments from the accident years of 2016 and prior. And then we've seen favorable development relative to the loss takes both from a '17 perspective and an '18 on a macro point of view.

No change relative to our overall reserving principles, the macro process that we run just more -- we continue to see favorable underlying development in our case incurred trends across the business and that's reflected in the results in terms of where we came out this year for the quarter. In terms of a relevant data point, this is similar to what you might have seen from a reserve favorable development in the first quarter of 2017. I think you'll find those numbers are close. They have no correlation relative to what we're doing. But this is not a number that's unusual for our company to potentially have from a trend perspective.

Christopher Campbell -- Keefe, Bruyette, & Woods, Inc -- Analyst

Okay. Got it. And then just kind of building on our last question. So what is the current spread that you guys have between your rates and loss cost for the two auto businesses?

Joseph P. Lacher -- President & Chief Executive Officer

That's not a stat we typically give Chris. We don't provide those components. I'm trying to figure out how I can help you with what you're doing -- with what you're -- I'm assuming you're trying to connect those to try to project a loss ratio or a combined ratio?

Christopher Campbell -- Keefe, Bruyette, & Woods, Inc -- Analyst

Yes. The idea was, yes, like to kind of see what their trends will be just underlying what the business is on the core loss ratio. So, I guess, do you guys have like a loss cost inflation, like I don't know, like 3% to 4%or 5% to 6%, something like that. And like if we look at the rate filings, we could kind of get an idea of, like, OK, their normalized loss cost inflation is expressed and we are seeing these rate increases?

Joseph P. Lacher -- President & Chief Executive Officer

So, I'm going to give you maybe a more complicated answer than you're looking for, Chris, and you can help me -- help you. Over the long-term, auto loss cost inflation tends to run in a 3% to 4% range. When you go to any individual line, but you're dealing with collision or bodily injury, you can periodically see them outsize on that. You can -- if you're talking about total inflation, that would also include frequencies. So there is frequency pass. If you're just talking about ex-frequency, just severity, you'd a slightly different answer.

If you're trying to project what you're going to see as a net impact to our profit margins, I'm going to point you back to the fact that we say we target a low double-digit ROE and after that, we look to grow as much as we can. So, what our folks would be doing in any given state, and any given line, and any given rate filing is they would look inside of that particular spot and say, what are the profit margins looking like there. What are they seeing with loss trends in that environment, frequency and severity? How much of that do they think is environmental versus what do they think might be the reaction is something we're doing inside of our claims department? What do they think is going to happen over the course of the next 12 months? And then, look -- put all of that together to think through what should we be doing from a rate perspective to march going forward?

We have fairly strong combined ratios right now. We've talked about that a little bit already. Our general bias would be that if we were seeing -- we will be trying to find a way to grow the business at those combined ratios.

Christopher Campbell -- Keefe, Bruyette, & Woods, Inc -- Analyst

Got it. And are you seeing any difference between, like I mean, after you look at some of like the inflation series that the government tracks and things like that, it looks like there is like starting to be an uptick in some of, like more the maintenance repair and kind of more PD collision type of loss costs. I mean are you seeing like a big difference between that because I would think you'd be mostly underweight PD and kind of more overweight liability loss costs? Is that like a good way to think of, the way your book would be tilted toward those inflation drivers?

Joseph P. Lacher -- President & Chief Executive Officer

We end up on our Specialty auto business will sell a higher percentage of liability only policies and you would in a typical preferred book -- a typical preferred book could be full coverage. What ends up being liability only though is, let's say I buy a policy that's liability only, I'm not covering my vehicle but if I crash into units my fault, we're still repairing your vehicle and any bodily injury. So a liability only policy has both physical damage and bodily injury payments associated with it, it's just not my repairing my car, it's repairing yours and any bodily injury, you have. So we're still getting some metal and some flesh that's running through these. So we look at all of those external trend in pieces of information and we take those in as environmental components. We're also looking at what we're seeing locally and more granularly our product management team will be pressing them very much at a local point of view around that. It's a tactical issue.

Christopher Campbell -- Keefe, Bruyette, & Woods, Inc -- Analyst

Okay. Great. That's very helpful. And then just kind of a numbers question, maybe this one's for Jim. I was looking at the net investment income, why was the dividends on equity securities that look like it's spiked in 4Q. It was like $6.6 million last quarter and then it was only $2.3 million this quarter, and like this number looks more like -- like what the prior data points would be. Did anything special happen last quarter with that?

James J. McKinney -- Senior Vice President & Chief Financial Officer

No, nothing special. I mean it's -- we have a reasonably sized book. We have continued to diversify even our alternative investments books in terms of the timing from their place, not a real material change in the types, but just in terms of how they're layered, I think what you're pointing to, and the way I would think about that Chris, is being more episodic to that moment that any kind of general trend that I would take away. Big picture, I think if you look over the business for the last several years, you'll see from a percentage standpoint we're relatively in line with our historical holdings. And I would continue to expect similar type returns going forward. Market dependent of course but no real change here in terms of our investment philosophy, underlying investment returns over time and how we think those are going to play out.

Christopher Campbell -- Keefe, Bruyette, & Woods, Inc -- Analyst

Okay. Great. Well thanks for all the answers. Best of luck in the second quarter.

James J. McKinney -- Senior Vice President & Chief Financial Officer

Thanks, Chris.

Operator

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

Joseph P. Lacher -- President & Chief Executive Officer

Thanks, operator. And thanks to everybody on the call for your time today and for your interest in Kemper. We look forward to being with you in the next quarter. Thanks a lot.

Operator

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

Duration: 46 minutes

Call participants:

Michael A. Marinaccio -- Vice President, Corporate Development and Investor Relations

Joseph P. Lacher -- President & Chief Executive Officer

James J. McKinney -- Senior Vice President & Chief Financial Officer

Duane Sanders -- Senior Vice President & President, Property & Casualty Division

Matthew Carletti -- JMP Securities -- Analyst

Gary Ransom -- Dowling & Partners -- Analyst

Paul Newsome -- Sandler O'Neill -- Analyst

Adam Klauber -- William Blair & Company -- Analyst

Christopher Campbell -- Keefe, Bruyette, & Woods, Inc -- Analyst

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