In total, these businesses generated roughly $1 billion in gross premium in 2002, Kemper said.

In addition to Securitas, the transaction will also involve New York-based private-equity firms Cypress Group LLC and Gilbert Global Equity Partners, as well as some of Kemper's senior management.

“The transaction around our middle market, small business and related specialty lines will support our efforts to enhance our services platform as a third-party administrator,” said David B. Mathis, chairman and chief executive officer at Kemper, which is currently the sixth largest provider of U.S. workers compensation, according to insurance rating agency, A.M. Best.

“Looking ahead, we will become a much smaller organization. However, there will be opportunities for many employees with the new commercial lines company, the services platform, and in facilitating an orderly withdrawal from lines of business that we are exiting.”

The new company will be led by Robert A. Lindemann, currently a senior vice president at Kemper. It will also operate under the Kemper brand name, and both the new entity and Kemper Insurance Cos. will be run from the Long Grove, Ill., headquarters.

Major rating agencies reacted to the company's latest news with downgrades.

Thomas S. Jalics, an associate director at Fitch Ratings in New York, told National Underwriter that everyone was a little bit surprised by Kemper's latest announcement, although it shouldn't have been a complete shock given the company's ongoing capital constraints, plummeting ratings and mounting losses.

“But Kemper's middle-market offerings including workers' compensation were the core business lines the company said it was now going to focus on,” said Mr. Jalics, referring to Kemper's strategy in the past few months to focus primarily on standard commercial lines and sell renewal rights to its specialty lines. “So this is another change of strategy for the company.”

“But it's not a total surprise given their cash crunch. The action reflects a company under a significant financial stress,” he said.

Mr. Jalics said he wasn't sure yet how the remaining part of the company would handle old liabilities without former assets. He also added that he wasn't certain whether the transaction would get the necessary regulatory approval.

Mr. Jalics's firm downgraded the financial strength ratings of three primary insurance underwriters of the Kemper Insurance Companies to “double-C” from “B-plus”. Fitch also lowered the $700 million of surplus notes issued by Kemper's Lumbermens Mutual Casualty Co. to “C” from “triple-C”, while removing all ratings from Rating Watch Negative. “With some of it, they are in a high default risk area,” Mr. Jalics said.

At New York-based Standard & Poor's Ratings Services, counterparty credit and financial strength ratings on the members of the Kemper Insurance Cos. intercompany pool were lowered to “B-plus” from “double-B-plus”, with ratings remaining on CreditWatch with “negative” implications. S&P said its “triple-C” rating on Lumbermens surplus notes also remains on CreditWatch with “negative” implications.

“The rating action was attributable to the decision to cease underwriting activities except as necessary to meet existing obligations, fourth-quarter adverse loss reserve development, and significant deterioration in policyholders surplus,” said S&P Credit Analyst Frederic Sklow.

For 2002, Kemper year-end consolidated surplus fell to $1 billion, he said, which represents a decline of some $475 million from the 2001 year-end surplus of $1.5 billion. The company also posted a net loss of $312 million, compared with a net income of $121 million in 2001.

New York-based Moody's lowered its insurance financial strength ratings for members of Kemper's intercompany pool four notches to “B3″ from “Ba2″ and downgraded ratings of Lumbermens surplus notes to “Ca” from “Caa1″.

Commenting on Kemper's deal to sell renewal rights to its middle-market offerings, Sarah Hibler, senior credit officer at Moody's, said, “We considered those businesses as core strategic parts of Kemper. But there were very few alternatives left for the company. Given this transaction, there is a substantial uncertainty in regard to what Kemper's ongoing business prospects are.”

Ms. Hibler added that the uncertainty related to Kemper's business prospects is making it more likely that regulators could deny the company's request to make upcoming interest payments on surplus notes in June.

The ratings downgrade also reflects a reassessment of the potential severity of loss that could be borne by note holders, especially if there is further erosion of the insurer's capital base, she said.

Separately, Oldwick, N.J.-based A.M. Best Company also lowered financial strength ratings for participants of Kemper Insurance Companies intercompany pool, 10 reinsured affiliates and one domestic affiliate, to “B” (fair) from “B-plus” (very good). Additionally, A.M. Best has lowered the debt rating of Lumbermens surplus notes to “triple-C-plus” from “double-B.”

“It is surprising that Kemper is going to cease underwriting activities, and we are working on the full analytic of that decision as more details are finalized,” said Angela Quinn, an analyst at A.M.Best.

Recent Kemper Deals

Mar. 4: New company buys renewal rights to middle market and small business lines.

Feb. 27: Arch Insurance Group buys renewal rights to surety business.

Jan. 30: AXIS Capital Holdings buys renewal rights to financial lines specialty businesses, including director and officers and employment practices liability.

Jan. 23: Argonaut buys renewal rights to bundled large-risk national accounts.

Jan. 16: The Hartford buys renewal rights to a significant portion of Kempers group captives business.

Jan.15: Old Republic International buys renewal rights to some unbundled large-risk national accounts business.

Reproduced from National Underwriter Edition, March 10, 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.