Revamp, cuts hit Kemper

Jan 6, 2003  •  Post A Comment

Kemper Insurance Cos., overextended and hungry for additional capital, is shedding business lines and moving to change its ownership structure.

The business insurer also will lay off an undisclosed number of employees as part of the restructuring, a spokeswoman says. Kemper employs about 1,800 people at its Long Grove headquarters and 7,300 nationwide.

Stung by recent downgrades of its financial-strength ratings, the company is exiting several insurance lines, including risk management for Fortune 1000 companies, according to letters sent by Kemper to commercial insurance brokers late last month. The company will focus instead on providing insurance for middle-market firms and small businesses.

Kemper also plans to transform itself from a mutual insurer, owned by its policyholders, into a company owned by stockholders-a move it hopes will enable it to raise cash.

A Kemper spokeswoman wouldn’t disclose the percentage of its business accounted for by the lines to be jettisoned, nor do company filings with the Illinois Department of Insurance reveal the number. But industry experts estimate it at roughly 30%.

The new moves are Kemper’s latest attempt to shake off the aftereffects of the price-cutting and higher-than-expected losses that plagued the property and casualty insurance industry in the 1990s. While better-capitalized insurers have taken advantage of a spike in insurance rates in the last two years, Kemper’s poor capital position has stymied its growth plans.

Matter of timing

In addition, Kemper’s timing was off, as it moved into several new insurance lines in the late ’90s, when premium rates were still low. The company now finds itself with too little capital supporting too many business lines.

An effort to raise capital by forming a subsidiary in which Warren E. Buffett’s Berkshire Hathaway Inc. invested $125 million failed when Kemper couldn’t recruit additional investors. Kemper recently repurchased Berkshire’s stake.

The latest plan to restructure and demutualize comes after Oldwick, N.J.-based insurance rating agency A. M. Best Co. dealt Kemper a potentially crippling blow late last year by cutting the company’s financial strength rating to B+ from A-. Most commercial insurance brokers won’t place clients in a B-level insurer, and many lenders won’t allow B-rated companies to insure mortgaged property.

Kemper is hoping an unusual deal with Berkshire will stave off the massive client exodus that sank the last major business insurer downgraded to B level, Pennsylvania-based Reliance Insurance Co. Berkshire, which has insurance ratings at the highest levels, has agreed to guarantee payment of claims for the next 18 months on Kemper policies in the lines of business it plans to continue.

`Kiss of death’

“A B rating is the kiss of death,” says Timothy J. Cunningham, principal at Chicago-based Optis Partners LLC, a consultancy to insurance brokerages. “But the (Berkshire agreement) bought them 18 months. It probably will mitigate the majority of broker and customer concerns.”

Leading the way for Kemper will be Chairman and CEO David B. Mathis, who had been scheduled to retire in April. The company says he now will stay on “for the foreseeable future” as a result of the sudden resignation last week of President and Chief Operating Officer William D. Smith, who had been slated to take over as CEO and had been effectively running the company for the past year.

Kemper told brokers it plans soon to file an application with the Illinois Department of Insurance to demutualize. Policyholder ownership has created a corporate structure that has hampered efforts to attract outside capital.

Under the demutualization process, policyholders likely would receive shares in the company. Kemper then could turn to the public stock markets or private investors for additional capital.

But first, it must ride out the current financial storm. Insurance brokers, led by industry leader Marsh Inc., sent letters late last month apprising clients of Kemper’s situation and asking for written instructions on whether clients want to move to other carriers. That raises the possibility of large client defections that could derail Kemper’s turnaround plan, industry experts note. But the agreement with Berkshire should keep many in the fold, they say.

A spokesman for Chicago-based Aon Corp., the industry’s No. 2 insurance brokerage, says Aon is offering to obtain price quotes from competitors for Kemper customers uneasy about the insurer.

“There haven’t been a lot (of clients) asking for (quotes), but some have,” he says.

Growth constrained

Kemper’s financial results have suffered from aggressive growth it pursued in the late 1990s, at the tail end of a decade’s worth of insurance pricing wars that pinched profits across the industry. Rates have spiked in the last two years, particularly since the Sept. 11 terrorist attacks, but Kemper’s constrained capital position has limited its ability to write new policies and take advantage of the better pricing.

At the end of last year’s third quarter, Kemper’s statutory surplus-the number regulators use to determine whether an insurer can meet its commitments-was $1.53 billion, up slightly from $1.5 billion at the end of 2001, but down from $2.7 billion at the end of 1999, according to Kemper. Cash flow from operations for the first nine months of 2002 was negative $313.9 million; for all of 2001, it was negative $132.4 million.

“We’re really looking at a company that has a lot of issues it has to clean up,” says A. M. Best Group Vice-president Matthew Mosher.