Kemper FSR Lowered

A.M. Best Company lowered the financial strength rating to “A-” (Excellent) from “A” (Excellent) of the Kemper Insurance Companies, Long Grove, Ill.

It also assigned a “bbb-” rating to the surplus notes issued by Lumbermens Mutual Casualty Company, the lead member of the group. The rating will remain under review with negative implications pending the close of the sale of its personal lines business and the consummation of its comprehensive strategic relationship with Berkshire Hathaway, which includes certain reinsurance and capital raising transactions.

Kemper’s capitalization declined substantially in late 2001 due to a reduction in surplus caused by adverse loss reserve development principally in asbestos reserves, adjustments driven by the new NAIC accounting principles and modest losses from the Sept. 11 attacks.

At year-end 2001, the group entered into a retroactive reinsurance agreement on its asbestos reserves and in April 2002 signed two definitive agreements—one for the sale of its personal lines business to Unitrin and the other for the issuance of common stock for a newly-formed downstream holding company to Berkshire Hathaway.

Concurrent with the latter transaction, Kemper has entered into two reinsurance transactions, which incorporate an adverse development reinsurance cover on $3.5 billion core loss reserves that will be transferred to the downstream company and a third party quota share reinsurance agreement for 80 percent of some of its middle market businesses. Both of these will be provided by Berkshire Hathaway.

A.M. Best believes while these transactions provide near-term surplus relief, $125 million of additional equity capital and a certain degree of protection against adverse loss reserve development, the benefit to policyholders security provided by soft capital is short-term, and the financial flexibility of the organization is currently very limited.

However, the new structure should provide Kemper with freer access to capital over the long-term. The current capital position and the ongoing dedication of management resources to Kemper’s multi-year restructuring and repositioning plan may make it more difficult for it to take advantage of current hard market conditions. Nevertheless, Kemper recorded strong operating income in the first quarter of 2002, with $54.5 million in after-tax earnings.