Additionally, the debt rating for the $700 million surplus notes issued by Lumbermens Mutual Casualty Company, the lead member of Kemper's inter-company pool, was also lowered, to "C" from "Triple-C-Plus," because it has technically defaulted on interest payments of the surplus notes, the rating agency said.

The financial strength ratings of Kemper's Eagle Insurance Group was also cut in today's ratings action, to "B" (Fair) from "B-Plus" (Very Good).

One of the concerns expressed by A.M. Best involves the recent breakdown of the deal by Long Grove, Ill.-based Kemper to sell off renewal rights to its core business--including workers' compensation and auto offerings, as well as umbrella coverage sold in support of these lines.

"Kemper anticipated receiving gains or earnings benefits associated with the sale of certain subsidiaries, renewal rights commissions and shared services fees," A.M. Best noted. "The failure of the transaction changes the dynamics of the run-off plan, and leverage remains high."