Kemper Corp (KMPR) Q2 2020 Earnings Call Transcript

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Kemper Corp (NYSE: KMPR)
Q2 2020 Earnings Call
Aug 3, 2020, 5:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, ladies and gentlemen, and welcome to Kemper Corp.'s Second Quarter 2020 Earnings Conference Call. My name is Cole, 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, this conference call is being recorded for replay purposes.

I would now like to introduce your host for today's call, Christine Patrick, Kemper's Vice President of Investor Relations. Ms. Patrick, you may begin.

Christine Patrick -- Vice President of Investor Relations

Thank you, operator. Good afternoon, everyone and welcome to Kemper's discussion of our second quarter 2020 results. This afternoon, you'll hear from Joe Lacher, Kemper's President and Chief Executive Officer; Jim McKinney, Kemper's Executive Vice President and Chief Financial Officer; and Duane Sanders, Kemper's Executive Vice President and the Property & Casualty Division President.

We'll make a few opening remarks to provide context around our second quarter results and then open up the call for a question-and-answer session. During the interactive portion of the call, our presenters will be joined by John Boschelli, Kemper's Executive Vice President and Chief Investment Officer, and Erich Sternberg, Kemper's Executive Vice President and Life & Health Division President.

After the market close this afternoon, we issued our earnings release and published our first quarter earnings presentation, financial supplement and Form 10-Q. You can find these documents on the Investors section of our website at

Our discussion today may contain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, the company's outlook and its future results of operations and financial condition. These statements may also include impacts related to the COVID-19 pandemic.

Our actual future results and financial condition may differ materially from these statements. For information on potential risks associated with relying on forward-looking statements please refer to our 2019 Form 10-K, our second quarter 2020 Form 10-Q as well as our second quarter earnings release.

This afternoon's discussion also includes non-GAAP financial measures we believe are meaningful to investors. One such measure I would like to highlight again is as adjusted for acquisition. It is clearly important to understand our reported results, including the impact 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 as-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 of the combined businesses, we also display our financials as adjusted for acquisition. This view removes the impact of purchase accounting and includes historical Infinity information for periods prior to the closing of the acquisition to more easily provide a meaningful year-over-year comparison.

In our financial supplement, presentation and 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 on the Investors section of our website at All comparative references will be made to the corresponding 2019 period, unless otherwise stated.

Finally, I would like to note that due to the social distancing practices that Kemper is following in response to the COVID-19 crisis, our call participants are not in the same location. This may cause the question-and-answer section of our call to feel disjointed at times. We apologize in advance and ask for understanding from our listeners.

I will now turn the call over to Joe.

Joe Lacher -- President and Chief Executive Officer

Thank you, Christine. Good afternoon, everyone, and thank you for joining us today. We continue to find ourselves in unique times. The pandemic is impacting consumer behavior, the macroeconomy, the investment environment and how we conduct our business operations. We expect that to be the case for the foreseeable future.

While the effect of these items can be seen in various parts of our financials, in aggregate, we continue to deliver strong results. We remain confident in our business model, our financial position and our ability to continue to serve our customers and deliver value for our shareholders.

Let's now turn to page 4 to discuss our results this quarter. We recorded strong results in the second quarter in spite of the environmental challenges we faced. Net income was $126 million or $1.91 per fully diluted share. Adjusted consolidated net operating earnings were $79 million or $1.20 per fully diluted share. We generated a rolling four-quarter return on tangible equity, excluding unrealized gains, of 19%.

We talked a lot over the last few years about the value of our diversified model and how it enables us to deliver consistent returns. The positive investments and enhancements we've made across our businesses have resulted in significantly improved earnings and stable cash flows for both favorable as well as challenged economic environments.

Additionally, the model provide meaningful capital efficiency. Together with strong execution, these advantages enable us to consistently generate attractive returns for our shareholders. Our results in the current environment highlight the benefits of the model.

As we previously disclosed, our specialty and preferred auto businesses provided customers approximate credits during the second quarter. Our thought process follows a simple principle of providing attractively priced policies to our customers, while delivering reasonable returns to our shareholders. This matches customer expectations, allows us to significantly grow the business and to maximize shareholder value over time.

The pandemic has impacted most of the inputs in the auto pricing equation to some degree and the credits allow us to deliver pricing consistent with that principle. We will continue to monitor the impact of the pandemic and consistently apply this concept going forward.

Our specialty auto business continued its trend of strong performance in the quarter. Margins remained solid, and we were able to provide attractive pricing to our customers. This resulted in significant policy growth and further strengthened our market position.

Additionally, we continue to invest in our platform and capabilities, which will allow us to better meet the needs of our customers and drive future market share gains.

Our preferred segment also delivered a solid quarter. Both our auto and home and other lines showed continued improvement in underlying combined ratios as a result of ongoing profit improvement actions across the segment. While we are pleased with our progress, we continue to evaluate a number of actions that will lead to sustainable and profitable growth.

Similar to our other businesses, Life & Health was also impacted by the pandemic. Increased mortality experience was offset by reduced morbidity in our health book and net investment income was down as first quarter market challenges were recognized in the quarter.

While we expect some near-term volatility in benefit costs related to the pandemic, we remain positive about the long-term prospects and the strategic diversification benefits the Life & Health business brings to our organization.

Our strong balance sheet and ample capital and liquidity provide significant financial flexibility. This not only allows us to support our businesses through turbulent times, but also enables us to act on the opportunities that may present themselves in the current environment.

In summary, we successfully delivered profitable growth in an uncertain macroenvironment. We made important investments and enhancements to our capabilities, we strengthened our competitive advantages and we delivered significant value to our shareholders.

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

Jim McKinney -- Executive Vice President and Chief Financial Officer

Thank you, Joe. And good afternoon, everyone. Turning to our results on page 5. Net income for the quarter was $126 million or $1.91 per diluted share. This represents a 3% increase in net income versus the second quarter of 2019. Adjusted consolidated net operating income was $79 million.

Our ability to deliver strong top line growth, solid margins and attractive returns in an uncertain operating environment is a testament to the resiliency of our business model.

On page 6, we isolate the key sources of volatility. This was marked by pressure in alternative investments, seasonally elevated cat activity and increased prior-year development. Duane will touch on cat activity and the development later in the discussion.

One additional item of note is this quarter's strong equity market performance. It resulted in the recovery of a significant portion of the losses we experienced in Q1 within our equity portfolio.

Turning to page 7. Net investment income, including COLI, for the quarter was $68 million, down from $97 million in the quarter of 2019. Approximately 66% of the decrease was driven by our alternative investments which put pressure on our annualized portfolio yield. I'll remind you that many of these investments report on a lag, so the reduction reflects the pressure we saw in financial markets during the first quarter.

Our portfolio composition and strategy remains consistent and focus on high-quality fixed income investments. As of the second quarter, 93% of our fixed income portfolio consists of investment grade securities.

From a credit perspective, the portfolio continues to perform. Impairments were roughly 10 basis points. Broadly speaking, the quality and the diversity of the portfolio continues to effectively support our businesses.

Page 8 provides a walk of net investment income from 2Q '19 to 2Q '20. Aside from the impact of alternatives, our net investment income yielded solid returns. While rate movements were stark over the quarter, our portfolio remain relatively resilient. This is in large part due to actions we've taken over prior quarters to address the risk of a lower for longer interest rate environment, which included extending the duration on a large portion of our fixed income portfolio.

As of the second quarter, our weighted average maturity was 12 years, with an effective duration of 7 years.

Turning to page 9. Our capital and liquidity remain strong. We have $943 million of committed and contingent liquidity, an increase of over $75 million compared with the end of 2019.

We generated over $200 million of cash in the quarter and have generated over $560 million over the last 12 months. This is a testament to our diversified model, which is designed to produce stable cash flows to favorable as well as challenging economic cycles.

Broadly speaking, our capital management strategy remains unchanged. Our capital stack continues to provide significant financial flexibility to support our businesses and take advantage of market opportunities. Our insurance entities remain well capitalized. Our debt to capital ratio is below 16% and we have no near-term debt maturities.

On page 10, I'd like to highlight some of the capital metrics we track closely, including growth in tangible book value per share and tangible return on equity. Together these metrics demonstrate the efficiency of our capital deployment decisions an intrinsic value creation.

Over the last year, we have increased shareholder value by approximately 17% as measured by growth in tangible book value and cumulative dividends. This is driven by the team's strong execution capabilities and business model.

Our operating model continued to generate strong returns over the quarter, with a rolling four-quarter return on tangible equity, excluding unrealized gains of 19%. This is the fifth consecutive quarter of delivering tangible returns in high teens, low 20s area.

In summary, we are pleased with our financial performance over the quarter. Our strong balance sheet, financial flexibility and diversified operating model position us to deliver continued growth amid economic uncertainty and serve as a source of strength for all our stakeholders.

I would now like to turn the call over to Duane to discuss the results of our P&C segments.

Duane Sanders -- Executive Vice President and President, Property & Casualty Division

Thank you, Jim. And good afternoon, everyone. Let's begin with the Specialty segment on page 11. The segment continues to perform exceptionally well despite a challenging backdrop that included a reduction in consumer shopping activity and other pandemic items that impacted the P&L.

We generated approximately $68 million of earnings in the quarter. We continue to achieve industry-leading growth as we execute on opportunities to expand in both new and established geographies.

Policies in force increased 7.5% compared to 2Q '19 when excluding the sale of classic car and net earned premiums grew 10% year-over-year excluding the impact of $87 million of premium credit.

The reported combined ratio was 91%. The underlying combined ratio on an as adjusted basis was 89%. Our performance benefited from changes in driving behavior due to shelter in place orders that led to a decrease in frequency. This was partially offset by an increase in severity and bad debt as well as pressure on investment income.

The long-term outlook for the specialty segment remains attractive. We continue to deliver competitive pricing for our customers and generate consistently strong profitable growth. Investments in our business continue to strengthen our capabilities and low-cost operating model. These investments will enable us to enhance our value proposition to our customers and generate consistently attractive returns for our shareholders.

Turning to the preferred segment on page 12. We continue to make good progress in preferred. The second quarter underlying combined ratio for the segment was 84%. Preferred auto reported an underlying combined ratio of 89%.

Core performance continued to improve and the book benefited from similar favorable trends as our home and other underlying combined ratio also improved as we see continued benefits from our profitability improvement actions.

During the second quarter, we experienced seasonally elevated catastrophes, largely as a result of weather related events in the southeast. Catastrophe losses for the quarter were in line with 2Q '19 and significantly better on a year-to-date basis.

One additional item I'd like to note is the $9 million of adverse development we recorded in our auto book. The primary driver of this was an increase in demand notices in UMBI. At this point, it is unclear if this represents an increase in volume or an acceleration of timing.

For reserving purposes, we took the view that it's an increase in volume. It is important to note that we are not seeing similar activity in other parts of our preferred or specialty books.

In summary, we're pleased with the progress we've made over the last few quarters. The actions we've taken to enhance underwriting, pricing and exposures are paying off and we continue to evaluate additional opportunities to deliver sustainable profitable growth.

I'll now turn the call back to Joe.

Joe Lacher -- President and Chief Executive Officer

Thanks, Duane. Turning to our Life & Health results on page 13. Segment income was $16 million compared to $13 million in the second quarter of 2019. Please recall that the year-ago quarter had roughly $6 million of one-time items.

Performance in the quarter was impacted by pandemic-related mortality that was elevated, but in line with national experience. This was offset by lower morbidity in our health book and a couple of one-time items.

In addition, segment earnings were impacted by lower net investment income.

Going forward, to the extent that the nation continues to see elevated pandemic-related mortality, we would expect to see a parallel impact in our business.

During the quarter, we temporarily suspended new life sales due to stay at home orders. We have since resumed new business production and are continuing to adapt to the pandemic environment.

In summary, we remain positive about the long-term outlook for our life and health business. We continue to assess new growth opportunities and we expect the segment to continue to play an important strategic role in providing diversification benefits and enhanced capital efficiency.

Turning to page 14, I'd like to spend a few minutes discussing about how the current environment is impacting different areas of our business. The situation with the pandemic remains fluid as widespread state reopenings in June were followed by enhanced restrictions across some geographies as infection rates began to rise. The movement in and out of state recovery phases has implications for both the overall health of the economy, as well as consumer behavior.

Looking at our specialty and preferred segments, the degree of lockdown that states are experiencing, as well as the potential to shift between phases of reopening will impact driving as well as insurance shopping behavior.

In our Life & Health segment, we expect mortality experience to increase as COVID-related deaths increase, but remain in line with national trends. We expect increased market volatility and sustained low interest rates resulting from continued economic uncertainty to impact our investment portfolio.

Despite these challenges, our business continues to be well positioned to deliver value to all of our stakeholders. Our capital and liquidity are strong. We have a high quality and diversified investment portfolio that is built to support our businesses and our diversified business model provide consistent cash flow and returns.

Before I close, I'd like to acknowledge our employees. These have been challenging times for everyone. But every day, I'm reminded of the resiliency, dedication and focus of our entire team. Their commitment to meeting the needs of our customers while delivering value to our shareholders makes me proud to be part of this organization.

And now, I will turn the call back to the operator to take your questions.

Questions and Answers:


[Operator Instructions]. Our first question today will come from Greg Peters with Raymond James. Please go ahead.

Greg Peters -- Raymond James -- Analyst

Hey, good afternoon, everyone. A couple of questions. First, in the specialty business, I was wondering if you could give us more color around the policy count. I was looking at the data you provided and it looks like sequentially policies in force were down a little bit. So, I'm curious if that's just a reflection of what was going on during the second quarter versus the first quarter. In the context of what you said it certainly seems like you're growing. Just the follow-on would be where, what markets are you growing in relative to a year ago?

Joe Lacher -- President and Chief Executive Officer

Sure, Greg. Let me just make sure we're looking at the spot you are and make sure we're pointing at the same numbers. Where are you seeing -- what are you seeing in the sequential...

Greg Peters -- Raymond James -- Analyst

So, I'm on page 11 and you're showing policy count of $1,902 million. And then, if you go to the same slide, and this is slide 15, for specialty, it says $1,914 million. And this is for the first quarter.

Joe Lacher -- President and Chief Executive Officer

Got it. Yeah. Last year. Okay, I understand exactly.

Greg Peters -- Raymond James -- Analyst

This is not last year. This is the first quarter.

Joe Lacher -- President and Chief Executive Officer

I'm sorry, last quarter. Yes, I misspoke. First quarter of this year.

Greg Peters -- Raymond James -- Analyst


Joe Lacher -- President and Chief Executive Officer

There is a modest downtick in that sequentially. And you're correct. A big chunk of what we'd expect to be happening is there is dramatically less shopping behavior in the quarter. So, there is some impact when we do that sequential component. We are growing policies on a year-over-year basis.

Duane Sanders -- Executive Vice President and President, Property & Casualty Division

Just thinking about, Greg, that way, I'd also think about it that -- to Joe's point with shopping behavior, what you're seeing is a little bit of a difference in the mix just over those periods of time because of the disruption between those policies that are more six-month policies versus one year. And so, I think the right way to look at that is on the year-over-year basis just because some of that normal business that would have continued to flow and that is more short term in nature, effectively, you see less of that coming in and out. And you really see -- when you look at the one-year number in the quarter-over-quarter comparison, you see the difference in terms of the policyholders that are longer term inside your book and drive a lot of value.

Joe Lacher -- President and Chief Executive Officer

You should remember that -- the right way to look at it probably is ex classic car and that number in the first quarter was $1,879 million versus in the current quarter, $1,877 million. So, they're essentially flat. The decline you're seeing is largely driven by the classic car piece.

Greg Peters -- Raymond James -- Analyst

Mercury announced their results this morning and obviously they are a different market than you are, but they are in California. And they did announce that they intend to extend their premium refunds for the month of July. I know you guys have given a very generous program in the second quarter. Have there been any discussion about extending it beyond the second quarter or where do you think you're sitting with that at this moment?

Joe Lacher -- President and Chief Executive Officer

Sure. And I tried to address those comments early on and I'll sort of point back to those comments. We announced a 15% auto premium credit for the first two months of the quarter. We ultimately added some additional credits in June. The bulk of those additional credits were related to California.

When we took those additional credits in the month of June, we looked by line. So, for auto, we look by product, we look individual states and we look at the individual behavior that we are seeing underneath that. You were starting to see stay at home orders lifted and activity return in different paces. We are looking at all of the pricing variables that go into the auto equation.

Some of that's frequency. There has been severity impacts. There were bad debt impacts when we were extending grace periods. Net investment income has obviously been impacted. So, we were sort of looking at the totality of those and taking a view that we wanted to rebalance the equation, if you will. We had a point of view from a pricing perspective of where we thought was an appropriate relationship with the customer, generated a reasonable return for shareholders, and our goal was to grow the business as much as possible because we thought that provided the best answer for customers and it provided the greatest shareholder value creation by growing the organization over the long term.

We're going to take that same point of view as we look at the rest of the pandemic. So, if we see all of those variables coming together where the equation is out of balance, we'll think about additional premium credits as appropriate and we'll do it on that surgical basis, in an individual product and state level.

Maybe the best way for you to think about it, Greg, if I were in your shoes, might be to say we're not expecting to see a high degree of favorable benefits just in frequency work their way into the bottom line. We're looking to keep that equation largely balanced with the upfront intent.

Greg Peters -- Raymond James -- Analyst

Got it. When you talk about like -- talk about it like that, I'm looking at the underlying combined ratio for the specialty, which, obviously, came in below 90, which is a great result for you, but if I look at the -- it feels like the target is more in the low 90s versus below 90. Is that an inaccurate read or am I overthinking this?

Joe Lacher -- President and Chief Executive Officer

Well, it depends on what you're expecting in the investment income environment to be and sort of everything that works through the pricing equation. If we stop and we think about frequency, severity, bad debt components, service expenses that run through all of these items, whether not there is a difference in how frequently we're quoting in servicing policies, what the investment income picture is, we're in an uncertain environment. Error bars, if you will, around every one of those is a little bit wider in trying to peg where truth ultimately will end up on all of those So, we're looking at all of those equations. It becomes a little harder to project the exact outcome of all of them because they're all moving in slightly different directions and with a little more volatility than we normally have. Hopefully, that helps. So, we're not fundamentally changing our underwriting -- our ultimate ROE target or our ROATCE target because of this and we are recognizing that, in a different investment income environment, that might somewhat change the underwriting target. But those things should actually be held together when we think about the appropriate price for our customer and the appropriate return for shareholders.

Greg Peters -- Raymond James -- Analyst

That makes total sense. Just the final question. And I know you discussed it in your opening remarks, but can you just revisit the prior-year development and give us some more color around what you think is going on there and just some additional data, so we can help process this.

Joe Lacher -- President and Chief Executive Officer

Sure. Maybe I'll let Duane maybe to start and talk about it and then a couple of us may provide a little color as we go.

Duane Sanders -- Executive Vice President and President, Property & Casualty Division

Got it. Yeah. Thanks, Joe. So, are you speaking to on the specialty side or preferred side? I want to make sure I am addressing the question.

Greg Peters -- Raymond James -- Analyst

Well, specifically, you talked about the UMB notices. So, that's what I was specifically focused on.

Duane Sanders -- Executive Vice President and President, Property & Casualty Division

Yeah. Got it. Yeah. So, what we're seeing there, Greg, is -- I call it just a pronounced activity on the UMBI piece. And we're going to -- I think we're taking the right approach on it. We're going to monitor and track it. So, demand notices historically would come in, we had patterns around those. We could almost -- from a timing perspective, when those would show up. And it seemed to -- as of late has moved forward on us or has, again, I would call it pronounced. It's just more coming in that we've seen in the past. So, we're trying to see if this is something that's different, a change in pattern or what it might be.

Now, normally, what happens on the UMBI, it seems to be in the realm of attorneys work. You get the simpler stuff upfront, which might be some of the PIP actions and then you get your BI. Then it works its way into the UMBI. So, I don't know kind of if there is a change in kind of the norm for even on the attorney side where there is some acceleration on those cases.

So, again, we're watching it. It seems to be isolated right now, right there on the preferred side and we're going to continue to monitor it and see where it comes out.

Greg Peters -- Raymond James -- Analyst

Was it concentrated in a specific state or region?

Duane Sanders -- Executive Vice President and President, Property & Casualty Division

No, it is not. We've done some deep dives on that to better understand it. At this point, if I had to say, it would be more environmental in nature in terms of from a geographic perspective. It's not -- I can't say that it was California, New York, North Carolina. It seems to be just generally across the board.

Joe Lacher -- President and Chief Executive Officer

Hey, Greg. I think Duane is doing a really nice job kind of highlighting a little bit of the uncertainty. What I would take from a takeaway perspective is, we saw a little bit of a change in terms of a pattern in terms of just the speed at which things come in. You could read that, as his notes indicated, as more or you could read it as a similar event, but because you got a few less things going on in the world, accidents, other things, that attorneys potentially are getting to some of these things a little bit earlier in the cycle than they might normally do.

This is something that we've only seen really recently over the last two quarters. We took the approach to start with -- 'hey, we think it's going to be more, so we could have a highly confident number from a balance sheet, we could get this potential item behind us.' It could work out, quite frankly, at the end of the day that we just see it as an acceleration that's really due to the environment. But I think the takeaway is, realistically, we've got a strong balance sheet. We don't anticipate this being something that is ongoing and it's something that's really short term here in nature in terms of where we've seen it over the last couple of quarters.

Greg Peters -- Raymond James -- Analyst

Right. Thank you for the answers. I guess I should add, congratulations to Christine. And you guys got to sit down and talk to her about her definition of maternity leave.

Joe Lacher -- President and Chief Executive Officer

We did have a couple of discussions around optionality and she reminded us that she was more than an adult. But we do congratulate her on the newest addition to her family.

Greg Peters -- Raymond James -- Analyst

Thank you, everyone.


[Operator Instructions]. And our next question will come from Paul Newsome with Piper Sandler. Please go ahead.

Paul Newsome -- Piper Sandler -- Analyst

Thank you. Good afternoon, everyone. Could you give us a few more words on just the general competitive environment in the auto business, in particular? There are at least concerns within, I guess, the standard auto business that maybe State Farm and maybe some others -- I've seen some others are lowering rates under the assumption that some of this frequency trend might be sort of more permanent. My sense is that's not happening in non-standard, but I could be wrong. Just some thoughts as to what you see out there.

Joe Lacher -- President and Chief Executive Officer

Go ahead, Duane. Give it a shot. And I'll jump in too.

Duane Sanders -- Executive Vice President and President, Property & Casualty Division

Sure, certainly. So, I would have to say, I think you're thinking about it right, it is nuanced. It's nuanced into specialty versus preferred and you see the gamut in terms of activity. For the most part, in most states, regulators have really clamped down on any rate increases, but there is a smattering of rate decreases probably ranging from the nominal minus 1%, 2%, all the way up to minus 4% depending on the market. There still seems to be an uptick in rate in the Florida market, in particular, driven by PIP and the BI side. So, not as much on the downside there.

So, all in all, we find ourselves in a good spot. We monitor the marketplace. We're watching for all that rate activity to -- as it manifests its way through the process. But I think it depends on where you are, who you're competing against and then where each competitor finds themselves. So, it's vast and varied, I would say, at this point.

Joe Lacher -- President and Chief Executive Officer

I think the thing I'd add to it, Paul, and I agree with Duane, is the bulk of our business is in the specialty auto space and we are not seeing a meaningful difference in the competitive environment inside of that space. I know what you're talking about relative to a couple of the big guys in the preferred auto and home or the preferred auto space potentially behaving differently. We're not seeing that kind of change in activity inside of the specialty auto space.

Paul Newsome -- Piper Sandler -- Analyst

I'm also curious about any early reads on change in demand in the life insurance side of the house. I would expect there is some cross currents there with the renewed showing them why the product is valuable, but then the segment...

Joe Lacher -- President and Chief Executive Officer

Can I ask you to stop for one second? Can you just start the part of the question -- I heard -- I lost a couple of words and I don't want to stop you and have you do the whole thing over. I heard you on the life insurance.

Paul Newsome -- Piper Sandler -- Analyst

So, on the life insurance side, I was wondering if there have been any early reads on changes in demand for your product. I would imagine there are some cross currents there with obviously the product having some obviously increased value, but also it's a pretty -- it's a market segment that was pretty hard hit from an economic perspective.

Joe Lacher -- President and Chief Executive Officer

Yeah. What we're seeing particularly in our market segment, and I don't know how it works across all of life insurance, but in our segment we're seeing, if anything, a positive view. We suspended life sales for part of the quarter just because we're a fairly high touch kind of environment and we modified some of our processes around that, but we wanted to be respectful of shelter in place orders. Even if we were an essential business, we didn't see new sales as at the top of the urgent list. So, we slowed those down. We actually saw improvements in our lapse rates, meaning that people were making sure they paid their bills because they valued the product. So, that was a positive sign.

And in terms of once we've restarted the sales, we're seeing very strong and healthy new business sales. There is a little bit of pressure there, but I would describe it -- it appears to us to be more operational in nature of just the ability to get out and about and talk with people than it is any reticence or lack of interest from a demand perspective.

Sometimes you see a macroeconomic pressure or some sort of property-related cat that may have some pressure on demand. I think the fact that this is a pandemic-related issue, I think, has people thinking about issues and valuing the products differently. So, I think it's probably a plus.

Paul Newsome -- Piper Sandler -- Analyst

Appreciate the question and answers. Thank you very much.


[Operator Instructions]. And the next question will come from Abhi Pat with CIFC Asset Management. Please go ahead.

Abhishek Patwardhan -- CIFC Asset Management -- Analyst

Hi. This is Abhishek. Thanks for taking my question. In the light of the fact that most of the insurance companies are issuing refunds on the auto side at least, how should we think about your expenses, especially around the commissions that you pay in the agency channel to create more policies? Does that typically go down with the lower revenue or should we expect that number to stay static?

Joe Lacher -- President and Chief Executive Officer

Yeah. I'll go back to the comments I made at the top of the presentation and really back with Greg Peters. The way we're looking at these, any return premiums we have to customers is how it balances out in total. So, we're not looking at this on a univariate basis. We're looking at all of the items combined. So, make up a number. Pretend -- before we were shooting to run, you tell me what combined ratio you want to pick. Call it a 95. If we were trying to hit a 95 combined ratio and we expected a certain investment income return, which produced a certain profit margin, we're now looking at it and saying, OK, investment income is down a little bit, so that requires that 95 to be a little bit better. We're looking at what happened to frequency. We're looking at what happened to severity. We're looking at what might be running through as bad debt. We're looking at how we're handling commissions. We're looking at everything in that equation, and then we're saying what would the appropriate premium credit be to return to a largely neutral position, recognizing that there are sort of error bars or margins of error around each one of those assumptions.

So, the commissions, the operating expenses, overhead, everything is taken into account as we think about trying to rebalance that pricing equation, which, as an investor, I would suggest to you, makes it a little bit harder for you to do an exact line item model, but it makes it a little easier because we're projecting for you what the end outcome ought to be. So, if you're coming to the conclusion that the margin is radically different as a result, you're modeling it wrong because we're trying to bring it back, which is that neutrality.

Jim McKinney -- Executive Vice President and Chief Financial Officer

The one thing I would add to what Joe said that I think adds a little bit of clarity to this as well is, remember, this isn't a kind of one period or one point in time type of analysis. When you think about the investment rate environment, when you think about some of the reserves and what's going to happen, that is a multi-quarter, multi-year view that we have to have in terms of doing the right things both by our customers and our shareholders.

Joe Lacher -- President and Chief Executive Officer

And that's an excellent point. Jim. And I really forgot to describe that before. Think about this. When we're doing this, we're not trying to -- we don't price our policies per month. We price them over a policy term, a 6-month or a 12-month time period. So, when we're making these adjustments, we're saying what would the entire policy period generate. And that investment income might be earned over that entire period. You get a one-month good guy. You still have to deal with the investment income over the entire time period that might provide a slightly -- when you're looking at an individual quarter, a particularly good one quarter spot and then a little bit of pressure on another, we're pricing it over the entire policy period when we're thinking about this.

Abhishek Patwardhan -- CIFC Asset Management -- Analyst

Got it. And just a follow-up, if I may. When you say you provided the refund for, let's say, month of April and May and maybe even in the month of June, is that a prorated refund or how should I -- let's say, a policy costs $600 for six months. Is the refund going to be only for those three months or is it going to extend more than that? How should I calculate the refund?

Joe Lacher -- President and Chief Executive Officer

The way we handled it was customers that were active at the end of April got a 15% credit for their April premium in their May bill. Then customers who were active at the end of May got a 15% credit on their May premium delivered in their June bill. We did that for all of our auto customers. Then we came back. And in a couple of states on a couple of products, it appeared to us that the data, going through the same process I've described, warranted an additional credit. It was not 15%. It was a smaller number in those circumstances and we applied that for customers who had been customers as of the end of June. We applied it as a credit to their July bill.

Abhishek Patwardhan -- CIFC Asset Management -- Analyst

Got it. Understood. Thanks a lot.

Joe Lacher -- President and Chief Executive Officer

No problem. Happy to help. I know it's a little bit confusing on all of these and every company seems to do it a little bit differently, which is why we're trying to describe for you all the principle around which we're doing it and how we're approaching it because then that helps you understand what the answer is at the end and why.


And this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Lacher for any closing remarks.

Joe Lacher -- President and Chief Executive Officer

Thank you, operator. I appreciate it. Thank you all for being with us and for your interest. We're pleased with our results this quarter and look forward to talking to you again next quarter. Thank you very much.


[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Christine Patrick -- Vice President of Investor Relations

Joe Lacher -- President and Chief Executive Officer

Jim McKinney -- Executive Vice President and Chief Financial Officer

Duane Sanders -- Executive Vice President and President, Property & Casualty Division

Greg Peters -- Raymond James -- Analyst

Paul Newsome -- Piper Sandler -- Analyst

Abhishek Patwardhan -- CIFC Asset Management -- Analyst

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