A prolonged deterioration in the earnings of Kemper P&C and Kemper Corp last year and into 2022 is the reason given by AM Best for its decision to downgrade the firms’ Financial Strength Ratings (FSR).
AM Best said in a statement that it was downgrading the FSRs for all P&C subsidiaries and insurance companies affiliated with Kemper Corporation. It said it had reduced the FSR rating from A to A-. In addition, AM Best has downgraded the Long-Term ICR to “bbb-” (Good) from “bbb” (Good) and downgraded the Long-Term Issue Credit Ratings (Long-Term IR) and indicative Long-Term IRs of Kemper Corp. It said that the outlook of these Credit Ratings (ratings) has been revised to stable from negative.
At the same time, AM Best has downgraded the FSR to A- (Excellent) from A (Excellent) and the Long-Term ICR to “a-” (Excellent) from “a” (Excellent) of Reserve National Insurance Company (Reserve National) (Chicago, IL). Concurrently, AM Best has placed these ratings under review with developing implications. Reserve National will continue to receive support from the Kemper Life & Health Group until the transaction is completed.
Additionally, AM Best has withdrawn the FSR of A (Excellent) and the Long-Term ICR of “a” (Excellent) of Infinity Security Insurance Company (Chicago, IL) with negative outlooks, as the company was sold as a shell with no remaining policyholder liabilities in early August to Texas-based Transverse Specialty Insurance Company.
AM Best said in a statement: “The downgrades of Kemper P&C — lead rating unit of the group — and Kemper Corp., primarily consider the prolonged earnings deterioration of Kemper P&C and for Kemper Corp. overall in 2021 and through the first half of 2022, driven by unfavourable operating performance resulting from elevated inflation and supply chain disruptions. Additionally, deteriorating performance has been exacerbated by Kemper P&C’s concentration in California, where the regulatory environment is more challenging. As a result, rate filings will take time to earn into financials.”
It added: “Although AM Best previously contemplated sustained earnings weakness in 2022 for Kemper P&C and for Kemper Corp., actual year-to-date performance has been at or near the low end of AM Best’s expectations, while capital market volatility has exceeded expectations. This combination resulted in reduced risk-adjusted capitalization levels for the overall enterprise when viewed on a consolidated basis, as measured by Best’s Capital Adequacy Ratio (BCAR). AM Best expects that the group’s earnings will steadily improve over the remainder of 2022, and into 2023, but that the process will be gradual, and possibly uneven, and the potential for further interim capital erosion remains possible.”
These downgrades come in the same week that Kemper Corporation reported a net loss of $74.7m for Q2 2022 after a net loss of $62.6m in Q1 2021.
Total revenues for the quarter decreased $68.7m (5%), to $1,433.8m, compared to the second quarter of 2021, driven by an $81.3m decrease in the change in fair value of equity and convertible securities, $13.3m of lower Preferred P&C earned premiums, and an $8.2m decrease in net realized investment gains, partially offset by $33.4m of higher Specialty P&C earned premiums.
