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 property/casualty (P/C) ratings reflect a recent deterioration in earnings, solid balance sheet strength, and sufficient debt servicing capability. The ratings also consider the company's more volatile earnings profile caused by natural catastrophe exposures. Kemper has a strong business profile that is consistent with the company's IFS rating. The company has a midsize competitive position and competes with several considerably larger personal lines insurers. In addition, Kemper has announced underwriting and claims initiatives aimed at improving profitability over the next several years.
Kemper's life/health segment (United Insurance Co. of America and its subsidiaries) ratings reflect its continued stable underlying earnings, solid capitalization, and effective niche in the home service market, albeit a slow-growth market. The group has been a steady source of capital for Kemper, with dividend capacity to support parent objectives. Fitch views United's ratings as limited by its small size and scale relative to larger, national peers.
Kemper reported deterioration in P/C segment operating earnings in the first half of 2016 (1H16) as results for Alliance United Group (Alliance United), acquired in 2015, were pressured by increased frequency and severity trends. Consolidated net operating income declined to $4 million in 1H16, down from $28.5 million in the prior year.
Kemper reported a GAAP mid-year 2016 calendar-year combined ratio that increased to 109.0%, up from 103.7 in 1H15. Calendar-year underwriting results deteriorated largely as the result of increased losses at Alliance United along with higher incurred catastrophe losses. Kemper reported catastrophe losses of $86.6 million (10.8% of earned premium) in 1H16, due primarily to two hailstorms in Texas, up from $45.7 (7.2% of earned premium) million in the prior year.
Capitalization at the P/C operating company level scored 'Strong' on Fitch's proprietary capital model, Prism, based on year-end 2015 data, which is considered consistent with Kemper's 'A-' IFS rating. Other measures of capital strength also suggest Kemper is strongly capitalized. NAIC risk-based capital (RBC) for Kemper's legacy P/C subsidiaries was 322% of the company action level at year-end 2015. RBC for Kemper's lead life insurance company, United Insurance Co. of America, was approximately 359% at year-end 2015.
Financial leverage at June 30, 2016 was 29.7% and remains within median guidelines for the current rating category. GAAP fixed-charge coverage dropped to 1.0x in 1H16 and 2.6x for full-year 2015, largely due to depressed earnings during the year.
During 2016, Kemper's operating subsidiaries are permitted to pay approximately $154 million in dividends to the parent without prior regulatory approval, which would cover Kemper's 2016 interest expense by approximately 3.5x.
Life/Health segment underlying profitability remains strong and stable, with a return on total adjusted capital of 20% in 1H16. In 3Q16, Kemper will take a $50 million after-tax charge related to enhancements to its life insurance claim procedures, involving cross-referencing life insurance policies against the Social Security Death Master File and other databases. Kemper mentioned in its recent strategic investor call that it is expecting a $3 million-$3.5 million annual impact on future earnings over the near term as a result of changing the practice going forward.
Factors that could lead to an upgrade of Trinity Universal Insurance Co. and Kemper's holding company ratings include:
--Sustained underwriting profit;
--GAAP fixed charge coverage at or above 7x.
--Maintaining a Prism score of at least 'strong'.
Factors that could lead to a downgrade of Trinity Universal Insurance Co. include:
--Statutory fixed charge coverage below 3.5x;
--A combined ratio above 106% for a sustained period;
--Deterioration in capitalization with a P/C Prism capital model score below 'strong';
--RBC for the P/C entities below 200%;
--Financial leverage ratio that exceeds 30%.
Factors that could lead to an upgrade for the United Insurance Co. and its subsidiaries include:
--Sustained strong profitability with positive movement in Trinity Universal Insurance Co. ratings.
Factors that could lead to a downgrade for the United Insurance Co. and its subsidiaries include:
--A decline in RBC below 300% of the company action level;
--A sustained decline in profitability resulting in a return on capital below 5%.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Stable Outlook:
--IDR at 'BBB';
--$359 million senior notes 6% due 2017 at 'BBB-';
--$248 million senior notes 4.35% due 2025 at 'BBB-';
--$225 million credit facility at 'BBB-';
--$144 million subordinated notes due 2054 at 'BB'.
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 on www.fitchratings.com
Insurance Rating Methodology (pub. 15 Sep 2016)
Dodd-Frank Rating Information Disclosure Form
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.