CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Kemper Corporation's (Kemper) holding company ratings, including the senior debt rating at 'BBB-'. Fitch has also affirmed the Insurer Financial Strength (IFS) ratings of Kemper's operating subsidiaries at 'A-'. The Rating Outlook is Stable. A full list of ratings follows at the end of this press release.
KEY RATING DRIVERS
Kemper's ratings reflect modest but improving earnings, adequate balance sheet strength, and sufficient debt servicing capability from holding company cash and dividend capacity from its insurance subsidiaries. The ratings also consider the company's more volatile earnings profile caused by natural catastrophe exposures.
Kemper reported net earnings of $163 million for the first nine months of 2013, a 60% increase over the prior year period. The company's p/c underwriting results have shown meaningful improvement, aided by lower catastrophe losses, a greater benefit from favorable reserve development, and improved underlying performance. These results were partially offset by modestly lower earnings in the life/health segment.
For the first nine months of 2013, Kemper reported a GAAP combined ratio of 97.2%, which included 4.3pp of catastrophe losses and 4.1pp of favorable reserve development. This compares to a 105.4% combined ratio for the prior-year period, which include 6.5pp of catastrophe losses and 2.1pp of favorable reserve development.
The company has taken various premium rate actions across all segments. The runoff operations of Kemper Direct are performing well, contributing significantly to favorable reserve development in 2013. Kemper continues to experience elevated claims severity on its personal auto book, which is being addressed by continued rating actions and improved risk selection.
Kemper's Life/Health segment continues to generate stable earnings with minimal volatility. The segment reported a 4% reduction in operating profit to $98 million as of Sept. 30, 2013. The modest deterioration was primarily due to increased legal costs and expenses related to expanding its accident & health distribution channels. Sales of its accident and health products continue to trend favorably.
Fitch views Kemper's p/c companies as adequately capitalized and its life companies as strongly capitalized. NAIC risk-based capital ratios are projected at 340% and 450% of the company level action at year-end 2013, respectively. Net premiums written-to-surplus for Kemper's property/casualty operations remains acceptable for its line of business at approximately 1.8x. Kemper's financial leverage ratio remains in line with median guidelines at 24.8% as of Sept. 30, 2013.
Kemper maintains an acceptable level of investment risk with moderate exposure to risky asset classes, defined as below-investment-grade bonds, equity securities, alternative investments, and real estate. The company's risky assets make up 64% of shareholders' equity, which compares to a median ratio guideline of 75% at its current rating level.
Kemper's fixed charge coverage improved to 6.6x for the first nine months of 2013, largely due to better earnings during the period. This is further supported by strong holding company cash levels and solid dividend capacity from the life insurance subsidiaries.
Factors that could lead to a downgrade include statutory fixed charge coverage below 3.5x; a combined ratio above 106% for a sustained period; or a deterioration in capitalization with a p/c Prism capital model score below 'adequate', an RBC ratio for the p/c and life insurance entities below 200% and 250%, respectively, or a financial leverage ratio that exceeds 30%.
Factors that could lead to an upgrade include significant improvement in capitalization with a Prism score of 'strong', a sustained underwriting profit, and GAAP fixed charge coverage at or above 8x.
Fitch has affirmed the following ratings with a Stable Outlook:
--Issuer Default Rating at 'BBB';
--$610 million senior notes at 'BBB-';
--$325 million credit facility at 'BBB-'.
Trinity Universal Insurance Co.
United Insurance Co. of America
Union National Life Insurance Co.
Reliable Life Insurance Co.:
--IFS rating at 'A-'.
Additional information is available at www.fitchratings.com.
Applicable Criteria & Related Research:
--'Insurance Rating Methodology' (November 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology -- Amended