Moody's, A.M. Best Downgrade Kemper

The outlook for these ratings is "negative," Moody's stated.

"Kemper announced that the renewal rights transaction would include its core middle market and small business as well as some other lines of business. We considered those businesses as core strategic parts of Kemper," said Sarah Hibler, senior credit officer at Moody's.

"To the extent that Kemper is no longer going to writing this business, that's a credit negative. And given this transaction, there is a substantial uncertainty in regard to what Kemper's ongoing business prospects are," Ms. Hibler said.

She added that the uncertainty related to Kemper's business prospects are making it more likely that regulators could deny the company's request to make upcoming interest payments on surplus notes in June.

The new ratings downgrade also reflects a reassessment of the potential severity of loss that could be borne by note holders, especially if there is further erosion of the insurer's capital base, Ms. Hibler said.

Separately, Oldwick, N.J.-based A.M. Best also lowered the financial strength rating for participants of Kemper Insurance Companies intercompany pool, 10 reinsured affiliates and one domestic affiliate, to "B" (Fair) from "B-plus" (Very Good).

A.M. Best cited a weakened capitalization and ongoing operating uncertainties at Kemper for the downgrade. It also said the rating remains under review with negative implications pending the analysis of Kemper's 2002 year-end financials.

Angela Quinn, an analyst at A.M.Best in Oldwick, N.J., said the decision to downgrade was based on a number of factors. In addition to problems related to the lowered capitalization, there are execution risks associated with management's announced restructuring initiatives, Ms. Quinn said, including the sale of renewal rights to various lines of business, such as its financial lines, bundled and unbundled large risk national accounts, alternative risk programs, environmental, and excess casualty and surety business.

Additionally, A.M. Best has lowered the debt rating of surplus notes issued by Lumbermens Mutual Casualty Company, the lead member of Kemper's intercompany pool, to "triple-C-plus" from "double-B." Also, the "B-plus" (Very Good) financial strength rating of Kemper's Eagle Insurance Group remains under review with developing implications.

"The ratings change also takes into account the weakened liquidity and cash flow as a result of the Kemper's sale of several books of business," Ms. Quinn told National Underwriter.