TEXT-Fitch affirms Kemper Corp's ratings; outlook stable
Nov 21 - 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 this press release. The affirmation reflects Kemper's earnings and balance sheet ratios consistent with Fitch's median guidelines for the rating category. The ratings also reflect debt servicing capability from holding company cash and dividend capacity at its life insurance subsidiaries along with continued weak underwriting results and catastrophe losses in its property/casualty operations. Kemper's underwriting results continue to lag Fitch's personal lines coverage universe but remains in line with expectations for its rating. For the first nine months of 2012, the company reported a combined ratio of 105.4%, which included 6.5 percentage points of catastrophe losses and 2.1 points of favorable reserve development. This compares to a 111% combined ratio for the prior year period, which included 12.8 percentage points of catastrophe losses and 2.4 points of favorable reserve development. Kemper continues to take steps to improve profitability through rate increases and improved risk selection. Kemper announced a preliminary estimate of pre-tax catastrophe losses related to Superstorm Sandy of approximately $45 million. This would approximate full year catastrophe losses at $117 million, or just below 15% of prior year surplus of the property/casualty companies. Fitch views this level of catastrophe losses as material; however, the agency anticipates that this will not lead to a reduction in statutory capital. Kemper is reviewing strategic options for Kemper Direct and has ceased all direct marketing activities, due to profitability issues around this business. Concurrent with the decline in revenue, Kemper has initiated expense reductions in an effort to meet its profitability targets. Fitch views this decision favorably, as Kemper Direct has been a drag on earnings for several years. The company's earnings-based interest coverage remained weak at 3.5x as of Sept. 30, 2012, albeit improved from 1.6x for the prior year period. Fitch views this as being somewhat offset by strong holding company cash levels and solid dividend capacity from the life insurance subsidiaries, which covers Kemper's interest expense 10.5x. Fitch views Kemper's property/casualty companies as adequately capitalized and its life companies as strongly capitalized. NAIC risk-based capital ratios were approximately 305% and 500% of the company level action, respectively, as of Sept 30, 2012. Net premiums written-to-surplus for Kemper's property/casualty operations remains acceptable for its line of business at approximately 1.9x. The company's financial leverage ratio remains in line with median guidelines at 25.2% as of Sept. 30, 2012 and 28.9% when goodwill is excluded. Fitch believes the quality of Kemper's investment portfolio has improved over the past four years with reduced equity exposure and concentration risk. Kemper maintains exposure to limited liability investment companies and limited partnerships, which increases the volatility of its investment income. Kemper's Life/ Health segment continues to generate stable earnings with minimal volatility. The segment reported operating earnings of $103 million for the first nine months of 2012, relatively unchanged from the prior year period at $105 million. Sales of its new accident & health products continue to trend favorably. Although Kemper's property/casualty and life companies carry the same rating, they are evaluated separately and could diverge. Fitch views the life companies as stronger than the property/casualty companies but since both companies support the holding company debt, this difference is somewhat neutralized. Factors that could lead to a downgrade include interest coverage (as defined by holding company cash and statutory dividend capacity divided by interest expense) below 7x; a combined ratio above 106% for a sustained period; a debt to capital ratio that exceeds 30%; an RBC ratio for the property/casualty and life insurance entities below 200% and 250%, respectively; and catastrophe losses exceeding 15% of prior year surplus. Rating triggers that could lead to an upgrade include meaningful and sustained improvement in underwriting results on par with higher rated peers and significant improvement in capitalization. Fitch has affirmed the following ratings with a Stable Outlook: Kemper: --IDR at 'BBB'; --$610 million senior notes at 'BBB-'; --$325 million credit facility at 'BBB-'. Trinity Universal Insurance Co. United Insurance Co. of America Union National Life Insurance Co. Reliable Life Insurance Co.: --Insurer Financial Strength rating at 'A-'. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria & Related Research: --'Insurance Rating Methodology' (Oct. 2012). Applicable Criteria and Related Research: Insurance Rating Methodology - Amended
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