“While we've experienced success in our alternative risks business, it no longer fits with our strategy,” Mr. Mathis said.

In a separate deal, Old Republic International Corp. in Chicago announced that one of its subsidiaries will buy the renewal rights to some large-risk national accounts of Long Grove, Ill.-based Kemper, amounting to roughly $140 million in gross premiums.

Commenting on the agreement with Old Republic, Mr. Mathis said it is “in keeping with Kemper's strategy to become a smaller, more profitable company, allowing us the opportunity to enhance our balance sheet and allocate capital and resources to support other lines of business.”

Additionally, Kemper is hammering out final details with Schaumburg, Ill.-based Zurich North America Environmental to sell renewal rights to the existing policies of its environmental casualty business.

Kemper officials declined a request for an interview on its current refocusing effort. But the company appears to be backtracking from a major change in strategy it adopted about six years ago to move from a “standard” lines company to a “specialty” company.

At credit rating agencies, some of the analysts who follow the company said they are keeping a “wait-and-see” approach to Kemper's new efforts.

“The company is refocusing its efforts on standard commercial lines. This is a strategic refocus,” said Bob Partridge, managing director at Standard & Poor's in New York.

S&P is one of the rating agencies that has downgraded Kemper in recent weeks. Most recently, it lowered financial strength ratings on the members of the Kemper Intercompany Pool and reinsured affiliates to “double-B-plus” from “triple-B-minus.” It also lowered the subordinated debt rating on Lumbermens' $700 million surplus notes to “B-plus” from “double-B.”

“Our current ratings indicate that we would consider Kemper to be a vulnerable company, but at a higher range. The company is trying to shrink its overall business but make its book of business more profitable,” Mr. Partridge told National Underwriter.

“There are a series of issues,” he said. “The company faces a very tough market. It has had some reserve issues and a profitability issue on its specialty business in the past. There is a capital restraint in this organization. And the company is planning to focus in areas where it can have a competitive advantage.”

But Mr. Partridge warned against getting overly worried about the sales of Kemper's specialty business.

“The extent of refocusing effort here is significant. But many companies have sold books of business to reorganize. There are many financially strong companies that have done this before. Kemper just needs to do this successfully in a relatively short period of time,” he observed.

Fred Sklow, director at S&P's insurance ratings group, added that these recently announced deals would be the first step in Kemper's long-term strategy.

“Over the years, Kemper had a diverse book of business, and the company felt this is now the most appropriate approach. Going forward, these are businesses that would not fit with its current business strategy,” Mr. Sklow said.

Furthermore, Peter Patrino, senior director at Fitch Ratings in New York, argued that there is another factor, which resulted from rating downgrades, that could have contributed to Kemper's recent transactions.

“Another reason could be that the business it is selling is more ratings-sensitive,” Mr. Patrino said. “The multiple rating downgrades make it harder for Kemper to continue in these businesses.”

The buyers of the policies related to these businesses, in general, are more sophisticated purchasers of insurance, such as risk managers and brokers. “They are more likely to look at ratings, compared to someone buying auto insurance, for example,” he noted.

“Given Kemper's capital position, this is probably a prudent thing to do. But it's hard to tell how much business [Kemper] has to sell to get its ratings back up. We still have questions about its capital position. From Fitch's perspective, how it executes its strategy in 2003 will be very important,” Mr. Patrino said.

He also noted that companies selling renewal rights to other companies is an indication that they are looking to lower their operating leverage, and Kemper shedding some of its business validates Fitch's concern that the company's capital position is weak.

But comparing Kemper's recent deals to other troubled companies that have gone down this pathincluding Reliance Group Holdings, the now-bankrupt company that also suddenly began to sell pieces of its business a few years agomay still be premature. According to Mr. Patrino, some comparisons can be drawn here, but each company has its own story.

“A mutual company like Kemper has a better liquidity relative to its obligations, but some of that liquidity is subject to regulatory approvals,” he said. “And Kemper is free from the pressure of shareholders and quarterly earnings. But being a mutual also reduces its financial flexibility and the access to capital markets. So it's difficult to compare.”

Mr. Sklow also told National Underwriter that Reliance had some huge issues to deal with when it began to sell off business. Although Kemper also has some big issues, as many businesses do, the fact that there is a cut-through with Berkshire Hathaway Inc. is fairly significant for the company, he said.

“It's reasonable to assume that Berkshire did a thorough due-diligence on Kemper's book of business before signing the cut-through agreement, and we believe that is significant,” he said.

Kemper's current problems could also have some impact on the workers' compensation insurance market as well, Mr. Patrino observed, since Kemper is the ninth-largest writer of workers' comp in the United States in terms of net premiums written.

“Whenever you have a company like Kemper go through a strategic overhaul, it could certainly have an impact on how it prices business, which would have a trickle-down effect on other companies. If one major company changes its prices, it could impact how its competitors price their businesses,” he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 27, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.