OLDWICK, NJ–(BUSINESS WIRE)–AM Best assigned a long-term issue credit rating (long-term RI) of “bb+” (fair) to the $150 million junior subordinated debentures, due 2062, to be issued by Kemper Corporation (Kemper) (headquarters in Chicago, IL) [NYSE: KMPR]. The outlook assigned to the credit rating (rating) is negative. The new senior subordinated debt ranks junior to all outstanding senior unsecured obligations of the Company and senior to potential future preferred shares of the Company.
Proceeds from the junior subordinated debenture offering will be used for general corporate purposes, which may include normal course working capital and investment in other business opportunities, including acquisitions. and/or potential capital contributions to subsidiaries, and to pay related fees and expenses.
The rating assignment takes into account the rating profile of Kemper’s main insurance subsidiaries, as well as the leverage, coverage and overall debt service profile of the parent company, and the application of an appropriate notch to reflect the structural subordination of the holding company’s senior unsecured debt.
Kemper’s financial leverage, as calculated by AM Best, was in the low to medium range of 20% at the end of 2021. Following the issuance of the junior subordinated debentures, and also considering of the company’s recent senior debt offering, leverage will increase to the high 20% range, net of the scheduled repayment of all of Infinity’s $275 million outstanding senior unsecured notes Property and Casualty Corporation on March 25. Earnings coverage of interest expense was negative in 2021, given the company’s operating loss. However, the holding company has access to liquidity through a variety of sources, including cash and investments, revolving credit agreement and term facility, advances from certain subsidiaries under pre-approved Federal Home Loan Bank and dividends from its subsidiaries, as well as access to debt and equity capital markets. For 2022, Kemper estimates that its direct insurance subsidiaries would be able to pay approximately $191 million in dividends to Kemper without prior regulatory approval. AM Best expects Kemper’s leverage and hedging measures to remain within expectations.
The negative rating outlook for Kemper and for its main operating units primarily reflects the significant deterioration in the earnings of the group’s P&C insurance business in 2021, which has resulted in reduced capital levels of the operating companies and the holding company, and the likelihood of continued earnings weakness and the potential for further capital erosion in 2022. The underlying strong deterioration in underwriting performance in the second half of 2021 was a sharp increase in claims severity in the automotive sector, which accounts for the vast majority of the premium volume of the property and casualty insurance business, largely reflecting significant supply chain issues, labor shortages and inflationary pressures.
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