A.M. Best Co. has affirmed the financial strength rating (FSR) of
A- (Excellent) and issuer credit ratings (ICR) of “a-” of the
property/casualty subsidiaries and affiliated insurance companies (Kemper
Property and Casualty Group) (Kemper P&C) of Kemper
Corporation (Kemper Corp.) [NYSE: KMPR]. A.M. Best also has 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 (Reserve National) (Oklahoma City, OK).
Concurrently, A.M. Best has affirmed the ICR of “bbb-” and senior debt
ratings of “bbb-” on $250 million 6.0% unsecured senior notes due 2015,
$360 million 6.0% unsecured senior notes due 2017 and “bb+” on $150
million 7.375% subordinated debt due 2054 of Kemper Corp. In addition,
A.M. Best has affirmed the indicative ratings of “bbb-” on senior
unsecured debt, “bb+” on subordinated debt and “bb” on preferred stock
in the automatic shelf of Kemper Corp. The outlook for all ratings is
stable, with the exception of the outlook of Reserve National’s ratings,
which was revised to stable from negative. All companies are
headquartered in Chicago, IL, unless otherwise specified. (See link
below for a detailed listing of the companies and ratings.)
The affirmation of the ratings for Kemper P&C, led by Trinity
Universal Insurance Company (Trinity) (Dallas, TX), is reflective of
its solid risk-adjusted capitalization and balance sheet liquidity,
generally profitable earnings, diverse business profile and the
continual actions being taken to improve earnings, reduce exposure to
catastrophic loss and manage risks. These actions include increasing
rates, enhancing risk selection, reducing exposure in catastrophe-prone
areas, discontinuing its Direct to Consumer business segment and further
developing a formal enterprise risk management program. Kemper P&C,
which ranked 52nd in the United States based on 2013 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% net quota share reinsurance agreement.
Partially offsetting these positive rating factors is Kemper P&C’s
underwriting variability and negative operating cash flows in most of
the past five years. In addition, underwriting leverage remains above
average when compared with the private passenger automobile and
homeowner composite. Kemper P&C continues to face challenges by strong
competitive market pricing in its main private passenger auto lines of
business, potential catastrophic losses from increased severity of
weather events and continuation of low interest rates and equity market
volatility, which is putting pressure on investment returns. However,
following underwriting deterioration between 2011 and 2012, Kemper P&C
was able to improve capitalization from favorable operating earnings in
2013.
Kemper P&C’s outlook may be revised to negative or its ratings
downgraded if capitalization weakens or operating performance does not
show sustained improvement. The outlook on the ratings may be revised to
positive and upward movement in the ratings may occur if there is a
favorable earnings trend that leads to capital preservation without
excessive growth.
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. 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. Furthermore, A.M. Best notes 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.
Partially offsetting these strengths is A.M. Best’s belief that Kemper
L&H may be challenged to meaningfully grow its businesses given the
limited growth potential in the mature home service market. A.M. Best
also notes the continued high concentration of real estate and Schedule
BA assets—limited liability investment companies and limited
partnerships—relative to total capital that remain above industry
averages; however, the real estate is unlevered.
Positive rating movement is unlikely in the near term. Downward rating
actions may occur on Kemper L&H’s ratings if there is a decline in
capital, downward earnings trend, significant dividends to its parent,
or a negative rating action on Kemper P&C. Additionally, downward
pressure could occur if there is a change in Kemper Corp.’s willingness
or ability to provide financial support.
In affirming the ratings of Reserve National, A.M. Best notes its
generally increasing net premium trends, favorable operating performance
and adequate stand-alone risk-adjusted capitalization. A.M. Best has
revised the outlook of Reserve National to stable from negative, due to
the overall replacement of revenue from hospitalization products that
are subject to the challenges of the Affordable Care Act (ACA), with
life products and other supplemental health products that are not
subject to ACA requirements. Additionally, Reserve National has
demonstrated strong risk-adjusted capital and consistent profitability
on a statutory and GAAP basis, despite being challenged by life new
business surplus strain.
For a complete listing of Kemper Corporation, its subsidiaries and
affiliates’ financial strength, issuer credit and debt ratings, please
visit www.ambest.com/press/070209kemper.pdf.
The methodology used in determining these ratings is Best’s Credit
Rating Methodology, which provides a comprehensive explanation of A.M.
Best’s rating process and contains the different rating criteria
employed in the rating process. Best’s Credit Rating Methodology can be
found at www.ambest.com/ratings/methodology.
A.M. Best Company is the world's oldest and most authoritative
insurance rating and information source. For more information, visit www.ambest.com.
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