OLDWICK, N.J.--(BUSINESS WIRE)--AM Best has assigned a Long-Term Issue Credit Rating (Long-Term IR) of “bb+” (Fair) to the $150 million of junior subordinated debentures, due 2062, to be issued by Kemper Corporation (Kemper) (headquartered in Chicago, IL) [NYSE: KMPR]. The outlook assigned to the Credit Rating (rating) is negative. The new junior subordinated debt ranks junior to all of the company’s outstanding senior unsecured notes, and senior to potential future preferred stock of the company.
Proceeds from the junior subordinated debentures offering will be used for general corporate purposes, which may include ordinary course working capital and investments in other business opportunities, including acquisitions and/or potential capital contributions to subsidiaries, and to pay related fees and expenses.
The rating assignment considers the rating profile of Kemper’s principal insurance subsidiary units, as well as the parent company’s financial leverage, coverage and overall debt servicing profile, and the application of appropriate notching to reflect structural subordination of the holding company’s senior unsecured debt.
Kemper’s financial leverage, as calculated by AM Best, was in the low-to-mid 20% range at year-end 2021. Following the issuance of the junior subordinated debentures, and also considering the company’s recent senior debt offering – leverage will increase to the high 20% range, net of the planned retirement of all $275 million outstanding of Infinity Property and Casualty Corporation’s senior unsecured notes on March 25. Earnings coverage of interest expense was negative in 2021, given the company’s operating loss. However, the holding company has access to liquidity through various sources, including cash and investments, a revolving credit agreement and term facility, advances from certain subsidiaries under preapproved Federal Home Loan Bank agreements and dividends from its subsidiaries, as well as access to the debt and equity capital markets. For 2022, Kemper estimates that its direct insurance subsidiaries would be able to pay approximately $191 million in dividends to Kemper without prior regulatory approval. AM Best expects Kemper’s go-forward leverage and coverage metrics to remain within guidance.
The negative rating outlook for Kemper, and for its principal operating units, primarily reflects the significant earnings deterioration of the group’s property/casualty (P/C) insurance operations in 2021, which resulted in reduced capital levels at the operating companies and holding company, and the likelihood of continued earnings weakness and the potential for further capital erosion in 2022. Underlying significant deterioration in underwriting performance during the latter half of 2021 was a sharp rise in claims severity in the automobile line of business, which accounts for the vast majority of the P/C insurance operation’s premium volume, largely reflecting significant supply chain issues, labor shortages and inflationary pressures.
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