Beleaguered Kemper To Cease Underwriting Amidits disappointing 2002 year-end results, Kemper Insurance Companiesannounced that it will cease underwriting activities and sell itscore middle-market business to a new firm capitalized by equityinvestment firms, including an affiliate of giant reinsurer SwissRe.

The Long Grove, Ill.-based insurer said it will ceaseunderwriting activities except as necessary to meet its existingobligations. Going forward, Kemper will focus on expandingopportunities for its claim and insurance services platform to sellits capabilities to current and new customers, the companysaid.

Under its deal with New York-based Securitas Capital LLC, anaffiliate of Swiss Re, and others, in exchange for renewal rightsto Kemper's middle-market p-c business and some other lines, Kemperwill receive commissions on the renewals and other unspecifiedfinancial benefits. Kemper will also receive $9 million plusstatutory surplus for certain licensed insurance entities.

The middle-market business thats part of the deal includesworkers' compensation, package, auto offerings, as well as umbrellacoverage sold in support of these lines. The transaction will alsoinclude Kempers marine and small business accounts, andprofessional liability business for architects and engineers,Ohio-based GreatLand, and Kempers fidelity and ERISA bondoperation.

In total, these businesses generated roughly $1 billion in grosspremium in 2002, Kemper said.

In addition to Securitas, the transaction will also involve NewYork-based private-equity firms Cypress Group LLC and GilbertGlobal Equity Partners, as well as some of Kemper's seniormanagement.

“The transaction around our middle market, small business andrelated specialty lines will support our efforts to enhance ourservices platform as a third-party administrator,” said David B.Mathis, chairman and chief executive officer at Kemper, which iscurrently the sixth largest provider of U.S. workers compensation,according to insurance rating agency, A.M. Best.

“Looking ahead, we will become a much smaller organization.However, there will be opportunities for many employees with thenew commercial lines company, the services platform, and infacilitating an orderly withdrawal from lines of business that weare exiting.”

The new company will be led by Robert A. Lindemann, currently asenior vice president at Kemper. It will also operate under theKemper brand name, and both the new entity and Kemper InsuranceCos. will be run from the Long Grove, Ill., headquarters.

Major rating agencies reacted to the company's latest news withdowngrades.

Thomas S. Jalics, an associate director at Fitch Ratings in NewYork, told National Underwriter that everyone was a littlebit surprised by Kemper's latest announcement, although itshouldn't have been a complete shock given the company's ongoingcapital constraints, plummeting ratings and mounting losses.

“But Kemper's middle-market offerings including workers'compensation were the core business lines the company said it wasnow going to focus on,” said Mr. Jalics, referring to Kemper'sstrategy in the past few months to focus primarily on standardcommercial lines and sell renewal rights to its specialty lines.“So this is another change of strategy for the company.”

“But it's not a total surprise given their cash crunch. Theaction reflects a company under a significant financial stress,” hesaid.

Mr. Jalics said he wasn't sure yet how the remaining part of thecompany would handle old liabilities without former assets. He alsoadded that he wasn't certain whether the transaction would get thenecessary regulatory approval.

Mr. Jalics's firm downgraded the financial strength ratings ofthree primary insurance underwriters of the Kemper InsuranceCompanies to “double-C” from “B-plus”. Fitch also lowered the $700million of surplus notes issued by Kemper's Lumbermens MutualCasualty Co. to “C” from “triple-C”, while removing all ratingsfrom Rating Watch Negative. “With some of it, they are in a highdefault risk area,” Mr. Jalics said.

At New York-based Standard & Poor's Ratings Services,counterparty credit and financial strength ratings on the membersof the Kemper Insurance Cos. intercompany pool were lowered to“B-plus” from “double-B-plus”, with ratings remaining onCreditWatch with “negative” implications. S&P said its“triple-C” rating on Lumbermens surplus notes also remains onCreditWatch with “negative” implications.

“The rating action was attributable to the decision to ceaseunderwriting activities except as necessary to meet existingobligations, fourth-quarter adverse loss reserve development, andsignificant deterioration in policyholders surplus,” said S&PCredit Analyst Frederic Sklow.

For 2002, Kemper year-end consolidated surplus fell to $1billion, he said, which represents a decline of some $475 millionfrom the 2001 year-end surplus of $1.5 billion. The company alsoposted a net loss of $312 million, compared with a net income of$121 million in 2001.

New York-based Moody's lowered its insurance financial strengthratings for members of Kemper's intercompany pool four notches to“B3″ from “Ba2″ and downgraded ratings of Lumbermens surplus notesto “Ca” from “Caa1″.

Commenting on Kemper's deal to sell renewal rights to itsmiddle-market offerings, Sarah Hibler, senior credit officer atMoody's, said, “We considered those businesses as core strategicparts of Kemper. But there were very few alternatives left for thecompany. Given this transaction, there is a substantial uncertaintyin regard to what Kemper's ongoing business prospects are.”

Ms. Hibler added that the uncertainty related to Kemper'sbusiness prospects is making it more likely that regulators coulddeny the company's request to make upcoming interest payments onsurplus notes in June.

The ratings downgrade also reflects a reassessment of thepotential severity of loss that could be borne by note holders,especially if there is further erosion of the insurer's capitalbase, she said.

Separately, Oldwick, N.J.-based A.M. Best Company also loweredfinancial strength ratings for participants of Kemper InsuranceCompanies intercompany pool, 10 reinsured affiliates and onedomestic affiliate, to “B” (fair) from “B-plus” (very good).Additionally, A.M. Best has lowered the debt rating of Lumbermenssurplus notes to “triple-C-plus” from “double-B.”

“It is surprising that Kemper is going to cease underwritingactivities, and we are working on the full analytic of thatdecision as more details are finalized,” said Angela Quinn, ananalyst at A.M.Best.

Recent Kemper Deals

Mar. 4: New company buys renewal rights to middle market andsmall business lines.

Feb. 27: Arch Insurance Group buys renewal rights to suretybusiness.

Jan. 30: AXIS Capital Holdings buys renewal rights to financiallines specialty businesses, including director and officers andemployment practices liability.

Jan. 23: Argonaut buys renewal rights to bundled large-risknational accounts.

Jan. 16: The Hartford buys renewal rights to a significantportion of Kempers group captives business.

Jan.15: Old Republic International buys renewal rights to someunbundled large-risk national accounts business.

Reproduced from National Underwriter Edition, March 10, 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.