Kemper Sheds Its Specialty Business

Kemper Insurance Companies, which suffered downgrades by severalrating agencies in recent weeks, announced a number of deals tosell off renewal rights to some of its specialty business insurancepolicies.

“This transaction is another in a series of steps Kemper istaking to become primarily a standard commercial lines insuranceprovider,” said David B. Mathis, Kemper chairman and chiefexecutive officer, in a statement that detailed a transaction withThe Hartford Financial Services Group Inc.

In this deal, The Hartford purchased renewal rights to asignificant portion of the Kemper's group captives business, whichcould be worth up to $160 million in gross program premiums,according to Sue Honeyman, a spokesperson for The Hartford inHartford, Conn.

“While we've experienced success in our alternative risksbusiness, it no longer fits with our strategy,” Mr. Mathissaid.

In a separate deal, Old Republic International Corp. in Chicagoannounced that one of its subsidiaries will buy the renewal rightsto some large-risk national accounts of Long Grove, Ill.-basedKemper, amounting to roughly $140 million in gross premiums.

Commenting on the agreement with Old Republic, Mr. Mathis saidit is “in keeping with Kemper's strategy to become a smaller, moreprofitable company, allowing us the opportunity to enhance ourbalance sheet and allocate capital and resources to support otherlines of business.”

Additionally, Kemper is hammering out final details withSchaumburg, Ill.-based Zurich North America Environmental to sellrenewal rights to the existing policies of its environmentalcasualty business.

Kemper officials declined a request for an interview on itscurrent refocusing effort. But the company appears to bebacktracking from a major change in strategy it adopted about sixyears ago to move from a “standard” lines company to a “specialty”company.

At credit rating agencies, some of the analysts who follow thecompany said they are keeping a “wait-and-see” approach to Kemper'snew efforts.

“The company is refocusing its efforts on standard commerciallines. This is a strategic refocus,” said Bob Partridge, managingdirector at Standard & Poor's in New York.

S&P is one of the rating agencies that has downgraded Kemperin recent weeks. Most recently, it lowered financial strengthratings on the members of the Kemper Intercompany Pool andreinsured affiliates to “double-B-plus” from “triple-B-minus.” Italso lowered the subordinated debt rating on Lumbermens' $700million surplus notes to “B-plus” from “double-B.”

“Our current ratings indicate that we would consider Kemper tobe a vulnerable company, but at a higher range. The company istrying to shrink its overall business but make its book of businessmore profitable,” Mr. Partridge told NationalUnderwriter.

“There are a series of issues,” he said. “The company faces avery tough market. It has had some reserve issues and aprofitability issue on its specialty business in the past. There isa capital restraint in this organization. And the company isplanning to focus in areas where it can have a competitiveadvantage.”

But Mr. Partridge warned against getting overly worried aboutthe sales of Kemper's specialty business.

“The extent of refocusing effort here is significant. But manycompanies have sold books of business to reorganize. There are manyfinancially strong companies that have done this before. Kemperjust needs to do this successfully in a relatively short period oftime,” he observed.

Fred Sklow, director at S&P's insurance ratings group, addedthat these recently announced deals would be the first step inKemper's long-term strategy.

“Over the years, Kemper had a diverse book of business, and thecompany felt this is now the most appropriate approach. Goingforward, these are businesses that would not fit with its currentbusiness strategy,” Mr. Sklow said.

Furthermore, Peter Patrino, senior director at Fitch Ratings inNew York, argued that there is another factor, which resulted fromrating downgrades, that could have contributed to Kemper's recenttransactions.

“Another reason could be that the business it is selling is moreratings-sensitive,” Mr. Patrino said. “The multiple ratingdowngrades make it harder for Kemper to continue in thesebusinesses.”

The buyers of the policies related to these businesses, ingeneral, are more sophisticated purchasers of insurance, such asrisk managers and brokers. “They are more likely to look atratings, compared to someone buying auto insurance, for example,”he noted.

“Given Kemper's capital position, this is probably a prudentthing to do. But it's hard to tell how much business [Kemper] hasto sell to get its ratings back up. We still have questions aboutits capital position. From Fitch's perspective, how it executes itsstrategy in 2003 will be very important,” Mr. Patrino said.

He also noted that companies selling renewal rights to othercompanies is an indication that they are looking to lower theiroperating leverage, and Kemper shedding some of its businessvalidates Fitch's concern that the company's capital position isweak.

But comparing Kemper's recent deals to other troubled companiesthat have gone down this pathincluding Reliance Group Holdings, thenow-bankrupt company that also suddenly began to sell pieces of itsbusiness a few years agomay still be premature. According to Mr.Patrino, some comparisons can be drawn here, but each company hasits own story.

“A mutual company like Kemper has a better liquidity relative toits obligations, but some of that liquidity is subject toregulatory approvals,” he said. “And Kemper is free from thepressure of shareholders and quarterly earnings. But being a mutualalso reduces its financial flexibility and the access to capitalmarkets. So it's difficult to compare.”

Mr. Sklow also told National Underwriter that Reliancehad some huge issues to deal with when it began to sell offbusiness. Although Kemper also has some big issues, as manybusinesses do, the fact that there is a cut-through with BerkshireHathaway Inc. is fairly significant for the company, he said.

“It's reasonable to assume that Berkshire did a thoroughdue-diligence on Kemper's book of business before signing thecut-through agreement, and we believe that is significant,” hesaid.

Kemper's current problems could also have some impact on theworkers' compensation insurance market as well, Mr. Patrinoobserved, since Kemper is the ninth-largest writer of workers' compin the United States in terms of net premiums written.

“Whenever you have a company like Kemper go through a strategicoverhaul, it could certainly have an impact on how it pricesbusiness, which would have a trickle-down effect on othercompanies. If one major company changes its prices, it could impacthow its competitors price their businesses,” he said.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, January 27, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.