April 5, 2017 / 9:09 PM / 9 months ago

Fitch Affirms Kemper Corporation's Ratings; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, April 05 (Fitch) 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 at the end of this press release. KEY RATING DRIVERS Kemper's property/casualty (P/C) ratings reflect deterioration in 2016 underwriting results, volatile earnings profile caused by natural catastrophe exposures and weakened debt servicing capability. The ratings also consider the company's strong capitalization and business profile as a midsize personal lines writer with a competitive position consistent with the company's IFS rating. Kemper's life/health segment (United Insurance Co. of America and its subsidiaries) ratings reflect continued stable underlying earnings, strong capitalization, and effective niche in the home service market, albeit a slow-growth market. The group has been a steady source of capital for Kemper, with dividend capacity to support parent objectives. Fitch views United's ratings as limited by its modest business profile relative to larger, national peers. Kemper Corporation reported a GAAP 2016 calendar-year combined ratio of 105.6%, up from 103.6% in 2015. Results deteriorated largely as the result of higher incurred catastrophe losses and higher net operating losses at Alliance United Group. Kemper reported catastrophe losses of $110 million (6.8% of earned premium) in 2016, primarily related to two hailstorm events in Texas, up from $65 million (4.6% of earned premium) in the prior year. Capitalization at the P/C operating company level scored 'Strong' on Fitch's proprietary capital model, Prism, based on year-end 2015 data. Other measures of capital strength also suggest Kemper is strongly capitalized. The NAIC RBC ratio for Kemper's lead P/C subsidiary, Trinity Universal Insurance Company, was 322% of the company action level at year-end 2016. RBC for Kemper's lead life insurance company, United Insurance Co. of America, was 391% at year-end 2016. Financial leverage at Dec. 31, 2016 was 29.5% and remains within median guidelines for the current rating category. Kemper's GAAP fixed-charge coverage ratio dropped to 1.1x in 2016 from 2.6x for full-year 2015, as earnings included a $77.8 million pre-tax ($50.5 million after-tax) charge to recognize the impact of using death verification databases. The life/health segment reported a sizeable decline in net operating income to $30 million in 2016, down from $72 million in 2015, largely as a result of the charge to recognize the impact of using death verification databases. This follows a decline from $92 million in 2014. As a result, statutory return on assets fell to 0.9% in 2016 compared to 2.6% in 2015, while return on capital declined to 7.5% in 2016 from 14.8% in 2015. During 2017, Kemper's operating subsidiaries are permitted to pay approximately $133 million in dividends to the parent without prior regulatory approval, which would cover Kemper's interest expense by approximately 3x. RATING SENSITIVITIES Factors that could lead to an upgrade of Trinity Universal Insurance Co. and Kemper's holding company ratings include: --Sustained underwriting profit; --GAAP fixed charge coverage at or above 7x. --Maintaining a Prism score of at least 'strong'. Factors that could lead to a downgrade of Trinity Universal Insurance Co. and Kemper's holding company ratings include: --GAAP fixed charge coverage below 3x; --A combined ratio above 106% for a sustained period; --Deterioration in capitalization with a P/C Prism capital model score below 'strong'; --RBC for the P/C entities below 200%; --Financial leverage ratio that exceeds 30%. Factors that could lead to an upgrade for the United Insurance Co. and its subsidiaries include: --Sustained improvement profitability as measured by return on statutory total adjusted capital above 15%. Factors that could lead to a downgrade for the United Insurance Co. and its subsidiaries include: --A decline in RBC below 300% of the company action level; --A sustained decline in profitability resulting in a return on capital below 5%. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings with a Stable Outlook: Kemper --Issuer Default Rating at 'BBB'; --$359 million senior notes 6% due 2017 at 'BBB-'; --$248 million senior notes 4.35% due 2025 at 'BBB-'; --$225 million credit facility at 'BBB-'; --$144 million subordinated notes due 2054 at 'BB'. Trinity Universal Insurance Co. United Insurance Co. of America Union National Life Insurance Co. Reliable Life Insurance Co. --IFS rating at 'A-'. Contact: Primary Analyst (Property/Casualty Insurance) Christopher A. Grimes, CFA Director +1-312-368-3263 Fitch Ratings, Inc. 70 W. Madison St. Chicago, IL 60602 Primary Analyst (Life Insurance) Donald F. Thorpe Senior Director +1-312-606-2353 Secondary Analyst Martha M. Butler, CFA Senior Director +1-312-368-3191 Committee Chairperson Jeffrey A. Mohrenweiser, FSA, CFA Senior Director +1-312-368-3182 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. 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