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Standard & Poor’s has lowered its counterparty credit and financial
strength ratings on the members of the Kemper Insurance Cos. Intercompany Pool (Kemper pool) to ‘B-‘ from ‘B+’.
In addition, Standard & Poor’s lowered its rating on Lumbermens Mutual Casualty Co.’s surplus notes to ‘C’ from ‘CCC’. These ratings remain on CreditWatch with negative implications, where they were placed on Feb. 18.
“These ratings actions follow Kemper’s announcement on March 25,
that the Illinois Insurance Department had denied Kemper permission to make the next scheduled interest payments on its surplus notes,” said Standard & Poor’s credit analyst John Iten. Interest on the 8.3 percent surplus notes and 8.45 percent surplus notes is due June 1, 2003, while interest on the 9.15 percent surplus notes is due July 1.
Kemper also announced a tender offer for all notes outstanding at 10 percent of face value. If all notes were tendered, Lumbermens would pay about $70 million to note holders. This action would eliminate one class of creditors and facilitate creation of a new entity by a consortium of investors, which will buy the renewal rights to a portion of the ongoing book of business. The claims of the note holders on Lumbermens assets, however, are subordinated to
other creditors.
Therefore the tender offer will reduce the amount of cash available to pay policyholder obligations by a similar amount, though the new entity will pay Lumbermens $9 million for certain assets and, going forward, a commission on renewal business. Still to be resolved is whether the Insurance Department will permit Lumbermens to honor the letter of intent it signed in Dec. 2002 with Berkshire Hathaway. Under this agreement Lumbermens is to purchase, for $125 million, Berkshire Hathaway’s 15 percent equity interest in Kemper Insurance Group, Inc.
Standard & Poor’s expects to resolve the CreditWatch status of the
surplus note ratings as the interest payment dates are reached. The ratings on these notes will be revised to ‘D’ on actual default on these payments.
The CreditWatch status of the counterparty credit and financial strength ratings on the Kemper Pool will be resolved following additional information on management’s plans for running off the existing liabilities, including projected cash flows available to fund the orderly runoff of the Kemper Pool liabilities.