Fitch Ratings has affirmed the Insurer Financial Strength (IFS) ratings for
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
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
Kemper's life operations executed an internal co-insurance transaction in 2022 with a newly formed wholly-owned
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
Life/Health Segment: Ratings of Kemper's life/health segment,
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade for
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
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
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
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 '
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
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