Fitch Expects to Rate Kemper's Subordinated Debentures 'BB'

CHICAGO--()--Fitch Ratings expects to assign a 'BB' rating to Kemper Corporation's (Kemper) $150 million issuance of cumulative subordinated debentures maturing in 2054.

KEY RATING DRIVERS

Kemper intends to use the net proceeds from the sale of the debentures for working capital and other general corporate purposes, which may include retirement of a portion of its existing debt on or before its scheduled maturity date.

Interest on the subordinated debentures can be deferred for up to five consecutive years at the company's discretion, but interest payments are cumulative. Based on its rating criteria, Fitch assigns no equity credit to subordinated debt. Given Fitch's expectation of lower recoveries of subordinated debt and its loss absorption features, the rating is notched down from Kemper's senior debt by two notches.

Financial leverage (excluding unrealized investment gains/losses on fixed income securities) is expected to temporarily increase to 28.3% from 24% at Dec. 31, 2013. This remains consistent with Fitch's median guidelines for the current rating category.

GAAP fixed charge coverage was 7.0 times in 2013 and would decline to approximately 5.4x following the closing of this offering. Holding company cash and investments totaled $157 million at Dec. 31, 2013 and statutory dividend capacity of $217 million provides adequate debt servicing capabilities at 4.4x.

Fitch's current ratings on Kemper reflect the company's modest but improving earnings, adequate balance sheet strength, and sufficient debt servicing capability. The ratings also consider the company's more volatile earnings profile caused by natural catastrophe exposures.

On Dec. 11, 2013, Fitch affirmed all of Kemper's ratings with a Stable Outlook.

RATING SENSITIVITIES

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 assigns the following rating to Kemper:

--7.375% subordinated notes due 2054 'BB'.

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 - Effective Sept. 19, 2012 to Oct. 18, 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688011

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=821176

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Contacts

Fitch Ratings
Primary Analyst:
Dafina M. Dunmore, CFA, +1-312-368-3136
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Christopher A. Grimes, CFA, +1-312-368-3263
Director
or
Committee Chairperson:
Keith M. Buckley, CFA, +1-312-368-3211
Managing Director
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Dafina M. Dunmore, CFA, +1-312-368-3136
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Christopher A. Grimes, CFA, +1-312-368-3263
Director
or
Committee Chairperson:
Keith M. Buckley, CFA, +1-312-368-3211
Managing Director
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com