Best Affirms Kemper Corp., Affiliates and Subs Ratings

June 20, 2013

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 subsidiaries and affiliated insurance companies (P&C Group) of Kemper Corporation.

Best has 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 $250 million 6.0 percent unsecured senior notes due 2015 and $360 million 6.0 percent unsecured senior notes due 2017 of Kemper Corp., as well as the indicative ratings of “bbb-” on senior unsecured debt and “bb” on preferred stock in the automatic shelf that expires November 3, 2013 of Kemper Corp.

The outlook for all of the ratings is stable, with the exception of Reserve National, which is negative.

In addition Best has withdrawn the FSR of ‘A-‘ (Excellent) and ICR of “a-” of Response Indemnity Company of California.

All of the companies are headquartered in Chicago, Illinois, unless otherwise specified.

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

“This includes increasing rates, enhancing risk selection, reducing exposure in catastrophe-prone areas, discontinuing certain unprofitable business produced by the Kemper Direct business segment and further developing a formal enterprise risk management program. The P&C Group, which ranked 49th in the United States based on 2012 direct premiums written, 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 significant underwriting losses each of the last two years, which has contributed to its below average operating performance. In addition, underwriting and investment markets are challenging, underwriting leverage ratios are above average and operating cash flows were negative each of the last five years.”

Best also indicated 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.

“Also, surplus growth has been hampered by stockholders’ dividends. The P&C Group faces challenges by strong competitive market pricing in its main private passenger auto lines of business, potential catastrophic losses from a trend of increased severity of weather events and continuation of low interest rates and equity market volatility putting pressure on investment returns. However, despite deterioration in its underwriting performance, the P&C Group was able to improve capitalization.”

Best said its outlook for the P&C Group “may be revised to negative or its ratings downgraded if capitalization weakens or operating performance does not show sustained improvement. The ratings would be further stabilized by a favorable earnings trend that leads to capital appreciation without excessive growth.”

Best explained that the withdrawal of the ratings for Response Indemnity is based on its assessment that this company no longer meets Best’s criteria for interactive ratings due to its sale in February 2013, as well as its voluntary run-off status.

“The affirmation of the ratings for Kemper L&H recognize its important role within the Kemper organization, its strong niche presence in the home service life insurance market, as well as its well established employee agency field force and strong operating performance,” Best said. “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.” Best also noted 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 partial offsetting factors 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 “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.

“Downward rating actions may occur on Kemper L&H’s ratings 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 to Kemper L&H. The outlook may be revised to positive if the company experiences continuing positive operating earnings and growth in capital.”

In affirming the ratings of Reserve National, Best noted the company’s “generally increasing net premium trends, favorable operating performance and adequate stand-alone risk-adjusted capitalization.”

Best explained that the “continuation of the negative outlook is related to Reserve National’s in-force block of hospitalization products and the uncertainty around the ultimate effect of the Patient Protection and Affordable Care Act (PPACA). Additionally, the final effect of the PPACA still has not been fully determined. Currently, Reserve National is developing and marketing alternative products designed to take advantage of new opportunities created by PPACA.

“Downward rating actions may occur if Reserve National experiences a substantial decline in its earnings and surplus as a result of the Medical Loss Ratio (MLR) requirement, a decrease in operating performance and risk-adjusted capital. Conversely, the outlook for Reserve National may be revised to stable from negative should the company be successful in shifting its product mix to products, which are exempt from the mandate and maintain solid statutory earnings and risk-adjusted capital levels.

“The ICR of Kemper Corp. is based on the financial strength of its insurance operating companies, which is primarily driven by the P&C Group and subordination of the holding company’s senior creditors to the insurance companies’ policyholders. Kemper Corp.’s financial leverage is within guidelines for its current rating level.

“Liquid cash and short-term investments at the holding company at December 31, 2012 totaled $185.7 million, and it has an untapped $325 million unsecured revolving credit agreement that expires on March 7, 2016. Moreover, Kemper Corp.’s common shares are publicly traded on the New York Stock Exchange, providing additional financial flexibility to raise capital through the equity markets.”

For a complete listing of Kemper Corporation, its subsidiaries and affiliates’ FSRs, ICRs and debt ratings may be obtained from A.M. Best.

Source: A.M. Best

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