A.M. Best Affirms Ratings of Kemper Corporation, Its Affiliates and Subsidiaries
OLDWICK, N.J.--(BUSINESS WIRE)--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.
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