AM Best has assigned a Long-Term Issue Credit Rating (Long-Term IR) of “bbb” (Good) to the forthcoming $400 million of 3.8% senior unsecured notes, due 2032, to be issued by Kemper Corporation (Kemper) (headquartered in Chicago, IL) [NYSE: KMPR]. The outlook assigned to the Credit Rating (rating) is negative. The new senior unsecured debt ranks pari passu with the company’s outstanding senior unsecured notes.

Proceeds from the senior unsecured notes offering will be used primarily to fund the redemption of the $275 million of outstanding 5.0% senior unsecured notes due September 2022 of Infinity Property and Casualty Corporation (Infinity), a wholly owned subsidiary of Kemper, in accordance with the terms of the indenture governing those notes. The 2022 notes originally were issued by Infinity, and on Nov. 30, 2018, became guaranteed by Kemper, in connection with its acquisition of Infinity. Remaining proceeds from the senior unsecured notes offering are expected to be used for general corporate purposes, which may include ordinary course working capital and investments in other business opportunities, including acquisitions, and to pay related fees and expenses.

The rating assignments consider the rating profile of Kemper’s principal insurance subsidiary units, as well as the parent company’s financial leverage, coverage and overall debt servicing profile, and the application of appropriate notching to reflect structural subordination of the holding company’s senior unsecured debt.

Kemper’s financial leverage, as calculated by AM Best, was in the low-to-mid 20% range at year-end 2021, and will increase to the mid-to-high 20% range, net of the retirement of the Infinity senior unsecured notes. Earnings coverage of interest expense was negative in 2021, given the company’s operating loss. However, the holding company has access to liquidity through various sources, including cash and investments, a revolving credit agreement and term facility, advances from certain subsidiaries under preapproved Federal Home Loan Bank agreements and dividends from its subsidiaries, as well as access to the 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 go-forward leverage and coverage metrics to remain within guidance.

The negative rating outlook for Kemper, and for its principal operating units, primarily reflects the significant earnings deterioration of the group’s property/casualty insurance operations in 2021, which resulted in reduced capital levels at the operating companies and holding company, and the likelihood of continued earnings weakness and the potential for further capital erosion in 2022. Underlying significant deterioration in underwriting performance during the latter half of 2021 was a sharp rise in claims severity in the automobile line of business, which accounts for the vast majority of the property/casualty insurance operation’s premium volume, largely reflecting significant supply chain issues, labor shortages and inflationary pressures.

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