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.
RATING SENSITIVITIES
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:
Kemper
--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
Applicable Criteria
Insurance Rating Methodology (pub. 15 Sep 2016)
https://www.fitchratings.com/site/re/887191
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013304
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013304
Endorsement Policy
https://www.fitchratings.com/regulatory
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