Best Affirms Kemper Corp., Subs and Affiliates Ratings

June 18, 2012

A.M. Best Co. has affirmed the financial strength ratings (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of the property/casualty subsidiary and affiliated insurance companies (P&C Group) of Kemper Corporation.

Best also affirmed the FSRs of ‘A-‘ (Excellent) and ICRs of “a-” of Kemper Corp.’s life/health subsidiaries, collectively referred to as Kemper Life & Health Group (Kemper L&H), and the separately rated Reserve National Insurance Company, based in Oklahoma City.

In addition Best affirmed the ICR of “bbb-” and senior debt ratings of “bbb-” on unsecured senior notes and senior unsecured debt, as well as “bb” on preferred stock of Kemper, which is included in its “automatic shelf” that expires November 2, 2013.

The outlook for all ratings is stable, except for the ratings of Reserve National, which are negative. All companies are headquartered in Chicago, Illinois, unless otherwise specified.

The affirmation of the ratings for the P&C Group led by Dallas-based Trinity Universal Insurance is reflective of “adequate risk-adjusted capitalization and balance sheet liquidity, historically profitable earnings, diverse business profile and the actions being taken to improve the group’s earnings and manage its risks,” Best explained.

“This includes increasing rates, enhancing risk selection, reducing exposure in catastrophe prone areas and unprofitable markets and developing a formal enterprise risk management program. Kemper maintains a diverse business profile with a strong market presence, good geographic spread of risk, multi-channel distribution and long-standing agency relationships. Trinity reinsures the other members through a 100 percent net quota share reinsurance agreement.”

As partial offsetting factors Best cited “the P&C Group’s below average operating performance, elevated expense ratios, challenging underwriting and investment markets, combined with above average underwriting leverage ratios and negative operating cash flows, each of the last four years from declining premium collections and higher claims payments.”

Best noted that the group’s operating performance has been below its “expectations in recent years due to underwriting losses attributed to more frequent and severe weather events, competitive pricing and increasing automobile liability claims in several markets. Surplus growth also has been hampered by stockholders’ dividends paid to Kemper Corp.

“Pressure may be put on the outlook of the P&C Group if operating performance does not show an improving trend. The ratings may be downgraded if capitalization weakens; however, the ratings would be further stabilized by a favorable earnings trend that leads to capital appreciation without excessive growth.”

Best said the affirmation of the ratings for Kemper L&H “recognize its important role within the Kemper organization, strong niche presence in the home service life insurance market, as well as its well established employee agency field force and strong operating performance. The life/health subsidiaries are among the market leaders in the mature home service life insurance segment, predominantly marketing low face amount permanent and term life policies. Kemper L&H’s consolidated risk-adjusted capitalization is enhanced by its strong profitability, which historically has offset large dividend payments made to Kemper Corp.”

In addition Best noted that “Kemper L&H’s stable liability structure relative to its life/annuity peers is facilitated by the sale of straightforward, lower risk product offerings through career agents.”

As a partial offsetting factor Best indicated that it believes “Kemper L&H may be challenged to meaningfully grow its businesses given the limited growth potential in the mature home service market.”

Best also noted that the “the continued high concentration of real estate and Schedule BA assets—limited liability investment companies and limited partnerships—relative to total capital that remain well above industry averages; however, the real estate is unlevered.”

Best said it believes Kemper L&H is “well positioned at its current ratings for the foreseeable future. However, downward rating actions may occur should the P&C Group experience a material decline in its financial strength or should there be a change in Kemper Corp.’s willingness or ability to provide financial support.”

In affirming the ratings of Reserve National, Best noted “its generally increasing net premium trends, favorable operating performance and adequate stand-alone risk-adjusted capitalization. The continuation of the negative outlook reflects the uncertainty around what the ultimate effect the Medical Loss Ratio (MLR) regulation, as required by the Health Care Reform Act, will have on Reserve National’s in force block of hospitalization products.

“Downward rating actions may occur if Reserve National experiences a substantial decline in its earnings and surplus as a result of the MLR requirement. Conversely, the outlook for Reserve National may be revised to stable from negative should its hospitalization products be exempted from the MLR.”

Best also explained that the ICR of Kemper Corp. “is based on the financial strength of its insurance operating companies and subordination of the holding company’s senior creditors to the insurance companies’ policyholders. Financial leverage is not excessive; however, in 2011, the interest coverage ratio fell below guidelines for the current rating. This concern was partially mitigated by over $199 million of cash and short-term investments at the holding company at December 31, 2011.”

Best summarized the companies, and the ratings affected by its actions as follows:
The FSR of A- (Excellent) and ICRs of “a-” have been affirmed with a stable outlook for the following members of the Kemper Property and Casualty Group:
Trinity Universal Insurance Company
Alpha Property & Casualty Insurance Company
Capitol County Mutual Fire Insurance Company
Charter Indemnity Company
Financial Indemnity Company
Kemper Independence Insurance Company
Merastar Insurance Company
Mutual Savings Fire Insurance Company
National Merit Insurance Company
Old Reliable Casualty Company
Response Indemnity Company of California
Response Insurance Company
Response Worldwide Direct Auto Insurance Company
Response Worldwide Insurance Company
Union National Fire Insurance Company
United Casualty Insurance Company of America
Unitrin Advantage Insurance Company
Unitrin Auto and Home Insurance Company
Unitrin County Mutual Insurance Company
Unitrin Direct Insurance Company
Unitrin Direct Property & Casualty Company
Unitrin Preferred Insurance Company
Unitrin Safeguard Insurance Company
Valley Insurance Company
Valley Property & Casualty Insurance Company
Warner Insurance Company

The FSRs of A- (Excellent) and ICR of “a-” have been affirmed with a stable outlook for the following members of Kemper Life & Health Group:
United Insurance Company of America
Mutual Savings Life Insurance Company
The Reliable Life Insurance Company
Union National Life Insurance Company

The following debt ratings have been affirmed with a stable outlook:
Kemper Corp.—
–“bbb-” on $250 million 6.00 percent senior unsecured notes, due 2015
–“bbb-” on $360 million 6.00 percent senior unsecured notes, due 2017

The following indicative debt ratings have been affirmed on the automatic shelf that expires in 2013:
Kemper Corp.—
–“bbb-” on senior unsecured debt
–“bb” on preferred stock

Source: A.M. Best

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