Fitch Ratings has affirmed the Insurer Financial Strength (IFS) ratings for Kemper Corporation's (Kemper) property and casualty (P/C) lead operating subsidiary, Trinity Universal Insurance Company's (Trinity) at 'A' (Strong).

Fitch has also affirmed the rating for Kemper's holding company, including the Issuer Default Rating (IDR) at 'BBB+' and the senior debt ratings at 'BBB'. The Rating Outlooks for Trinity and Kemper's IDRs remain Negative. Fitch has also affirmed the ratings of Kemper's life insurance subsidiaries with a Stable Outlook.

The Negative Outlooks for Trinity and Kemper's holding company ratings primarily reflect continued underwriting weakness through 2022, compared to rating sensitivities, and operating environment challenges returning to near term underwriting profitability in 2023.

Key Rating Drivers

Underwriting Results: Kemper's underwriting results remained above rating sensitivities through 2022, largely as the result of heightened severity trends in both the Kemper Auto (non-standard personal and commercial auto) and Personal Insurance (preferred auto and homeowners) segments. The Kemper Auto and Kemper Personal Insurance segments reported GAAP combined ratios of 108% and 114%, respectively for full-year 2022. The company addressed underwriting performance with targeted rate increases as well as non-rate actions throughout the year but was initially limited in its ability to get higher rates approved in California, the company's largest state. A rate filing for specialty personal auto in California was approved in 4Q22.

A return to a Stable Outlook will be predicated on Kemper's ability to return to performance in line with rating sensitivities in 2023. This will largely depend on the company's ability to get earned rate increases into its book, as well as the direction of loss cost trends.

Company Profile: Kemper is a mid-tier P/C underwriter as the 11th-largest personal auto writer based on 2021 net premiums written, with a strong market presence in nonstandard auto insurance. Kemper maintains competitive advantages in core non-standard auto business, creating opportunities for profitable growth in recent years. The company also initiated a strategic review of its personal insurance business in 2022, which could have a modest near-term impact on the company's scale as well as volatility related to property exposure.

Capitalization: P/C operating subsidiary capitalization improved modestly in 2022, with the net loss reported during the period more than offset by capital contributions of $235 million from the parent company reported though 9M22. Fitch expects that Kemper will maintain strong overall capital levels and flexibility to contribute capital to operating subsidiaries from the holding company when prudent. Fitch's Prism capital model for the P/C group declined to the high end of 'Adequate' in 2021. Prism results for 2022 will be available in summer 2023, with results expected to benefit from the increase in P/C statutory surplus increase in 2022.

Kemper's life operations executed an internal co-insurance transaction in 2022 with a newly formed wholly-owned Bermuda captive, ceding 80% of the life business. The transaction resulted in lower capital requirements in the U.S. life subsidiary and a $300 million dividend from United Insurance Company of America to the parent. Fitch's life Prism model 2022 results are expected to be pressured by a $300 million decline in available capital.

Coverage and Financial Flexibility: GAAP fixed-charge coverage remained negative through 2022 at (4.3x), compared to (8.5x) in 2021, primarily driven by underwriting losses in the period. Average coverage in the three years prior (2018-2020) was 10.6x. Kemper's ability to return to producing high single-digit to low-double digit coverage will hinge on a return to favorable underwriting profitability. Financial flexibility and liquidity remain strong with holding company cash and invested assets of $418 million at YE22.

Reserve Development: Kemper's historical reserve experience is generally favorable, with modest volatility in its generally short-tailed reserves. The company reported $17 million of favorable development in the Kemper Auto and Personal Insurance segments in 2022, benefiting the calendar-year combined ratio by 0.4 points. The majority of prior-year reserve additions in 2022 were in the Kemper Auto segment, largely driven by the emergence of more favorable loss patterns than initially expected in the liability and physical damage business.

Life/Health Segment: Ratings of Kemper's life/health segment, United Insurance Company of America and its subsidiaries, reflect stable underlying earnings and an effective niche in the slow-growth home service market. The group has been a steady source of earnings for Kemper, with dividend capacity to support parent objectives, with capital and earnings diversification provided to the enterprise. Fitch considers the life/health subsidiaries to be 'Important' in the group rating approach, with a one-notch rating differential from Trinity Universal Insurance Company reflecting the life segment standalone assessment.

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade for Trinity Universal Insurance Co. and Kemper's holding company:

Maintaining combined ratios above 100%;

Financial leverage sustained above 28%;

Capital adequacy maintained below 'Strong';

Fixed-charge coverage consistently below 6x.

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade for Trinity Universal Insurance Co. and Kemper's holding company:

Returning to underwriting profitability;

Capital adequacy maintained at 'Strong' or better;

Fixed-charge coverage returning to high single digits or better could lead to a return to a Stable Outlook.

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade for the United Insurance Co. and its subsidiaries:

Deterioration in Kemper's life/health capitalization metrics, as measured by a Prism capital model outcome below 'Extremely Strong';

Consistent degradation in financial performance caused by outsized investment losses or poor underwriting performance, measured by an ROTC below 10% and an ROA below 1%;

Widening of the ALM mismatch, coupled with deterioration in cash flow testing results.

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade for United Insurance Co. and its subsidiaries:

Growth across the life/health operations with increased penetration in its market niche;

Sustained returns on equity above 8%;

An improved ALM mismatch to within three years or less.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

(C) 2023 Electronic News Publishing, source ENP Newswire