A.M. Best Affirms Ratings Of Kemper Corporation, Its Subsidiaries And Affiliates

A.M. Best Co. has affirmed the financial strength ratings (FSR) of A- (Excellent) and issuer credit ratings (ICR) of “a-” of the property/casualty subsidiary and affiliated insurance companies (P&C Group) 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 unsecured senior notes and senior unsecured debt, as well as “bb” on preferred stock of Kemper, which is included in its “automatic shelf” that expires November 2, 2013. The outlook for all ratings is stable, except for the ratings of Reserve National, which are negative. All companies are headquartered in Chicago, IL, unless otherwise specified. (See below for a detailed listing of the companies and ratings.)

The affirmation of the ratings for the P&C Group led by Trinity Universal Insurance Company (Trinity) (Dallas, TX) is reflective of adequate risk-adjusted capitalization and balance sheet liquidity, historically profitable earnings, diverse business profile and the actions being taken to improve the group’s earnings and manage its risks. This includes increasing rates, enhancing risk selection, reducing exposure in catastrophe prone areas and unprofitable markets and developing a formal enterprise risk management program. Kemper 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 the P&C Group’s below average operating performance, elevated expense ratios, challenging underwriting and investment markets, combined with above average underwriting leverage ratios and negative operating cash flows, each of the last four years from declining premium collections and higher claims payments. Operating performance has been below A.M. Best’s expectations in recent years due to underwriting losses attributed to more frequent and severe weather events, competitive pricing and increasing automobile liability claims in several markets. Surplus growth also has been hampered by stockholders’ dividends paid to Kemper Corp.

Pressure may be put on the outlook of the P&C Group if operating performance does not show an improving trend. The ratings may be downgraded if capitalization weakens; however, the ratings would be further stabilized by a favorable earnings trend that leads to capital appreciation without excessive growth.

The affirmation of the ratings for Kemper L&H recognize its important role within the Kemper organization, 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 well above industry averages; however, the real estate is unlevered.

A.M. Best believes Kemper L&H is well positioned at its current ratings for the foreseeable future. However, downward rating actions may occur should the P&C Group experience a material decline in its financial strength or should there be 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. The continuation of the negative outlook reflects the uncertainty around what the ultimate effect the Medical Loss Ratio (MLR) regulation, as required by the Health Care Reform Act, will have on Reserve National’s inforce block of hospitalization products.

Downward rating actions may occur if Reserve National experiences a substantial decline in its earnings and surplus as a result of the MLR requirement. Conversely, the outlook for Reserve National may be revised to stable from negative should its hospitalization products be exempted from the MLR.

The ICR of Kemper Corp. is based on the financial strength of its insurance operating companies and subordination of the holding company’s senior creditors to the insurance companies’ policyholders. Financial leverage is not excessive; however, in 2011, the interest coverage ratio fell below guidelines for the current rating. This concern was partially mitigated by over $199 million of cash and short-term investments at the holding company at December 31, 2011.

The FSR of A- (Excellent) and ICRs of “a-” have been affirmed with a stable outlook for the following members of the Kemper Property and Casualty Group:
  • Trinity Universal Insurance Company
  • Alpha Property & Casualty Insurance Company
  • Capitol County Mutual Fire Insurance Company
  • Charter Indemnity Company
  • Financial Indemnity Company
  • Kemper Independence Insurance Company
  • Merastar Insurance Company
  • Mutual Savings Fire Insurance Company
  • National Merit Insurance Company
  • Old Reliable Casualty Company
  • Response Indemnity Company of California
  • Response Insurance Company
  • Response Worldwide Direct Auto Insurance Company
  • Response Worldwide Insurance Company
  • Union National Fire Insurance Company
  • United Casualty Insurance Company of America
  • Unitrin Advantage Insurance Company
  • Unitrin Auto and Home Insurance Company
  • Unitrin County Mutual Insurance Company
  • Unitrin Direct Insurance Company
  • Unitrin Direct Property & Casualty Company
  • Unitrin Preferred Insurance Company
  • Unitrin Safeguard Insurance Company
  • Valley Insurance Company
  • Valley Property & Casualty Insurance Company
  • Warner Insurance Company

The FSRs of A- (Excellent) and ICR of “a-” have been affirmed with a stable outlook for the following members of Kemper Life & Health Group:
  • United Insurance Company of America
  • Mutual Savings Life Insurance Company
  • The Reliable Life Insurance Company
  • Union National Life Insurance Company

The following debt ratings have been affirmed with a stable outlook:

Kemper Corp.—--“bbb-” on $250 million 6.00% senior unsecured notes, due 2015--“bbb-” on $360 million 6.00% senior unsecured notes, due 2017

The following indicative debt ratings have been affirmed on the automatic shelf that expires in 2013:

Kemper Corp.—--“bbb-” on senior unsecured debt--“bb” on preferred stock

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.

Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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