Kemper Falls Again

A.M. Best Co. downgraded the financial strength ratings to “D” (Poor) from “C++” (Marginal) of the participants in the Kemper Insurance Cos.’ intercompany pool, eight reinsured affiliates and one domestic affiliate.

The downgrading of the Kemper Insurance Cos.’ rating follows the announcement that upon completion of the year-end 2002 independent financial audit, Lumbermens Mutual Casualty Co., the lead company of the inter-company pool, expects its year-end 2002 statutory surplus—as reflected in its annual statement—to be substantially lower than currently stated. The reduction is a result of events related to the decision to enter into voluntary run-off and terminate the surplus notes tender offer in 2003, which were evaluated after completing the year-end 2002 statutory statement. The adjustments in policyholders’ surplus are primarily attributable to the inadmissibility of deferred tax assets, impairment of certain equity securities, real estate and goodwill and an accrual for deferred revenue in Lumbermens’ service operations.

Although the total amount of these adjustments has not been disclosed, management has indicated that if the adjustments had been reflected in Lumbermens’ 2002 statutory filing, total risk-adjusted capital would fall within the mandatory control level of the risk-based capital calculation required by the Illinois Department of Insurance.

Also downgraded were the financial strength ratings to “C++” (Marginal) from “B” (Fair) of the Eagle Insurance Group due to the weakened capitalization of its ultimate parent, Lumbermens, and uncertainty of actions to be taken by the Illinois DOI. Eagle maintains an above average dependence on reinsurance recoverables from Lumbermens.

The rating of Eagle Insurance remains under review with negative implications.