OREANDA-NEWS. February 29, 2016. Fitch Ratings has affirmed Kemper Corporation's (Kemper) holding company ratings, including the senior debt rating at 'BBB-'. Fitch has also affirmed the Insurer Financial Strength (IFS) ratings of Kemper's operating subsidiaries at 'A-'. The Rating Outlook is Stable. A full list of ratings follows at the end of this press release.

KEY RATING DRIVERS
Kemper's property/casualty ratings reflect modest earnings, solid balance sheet strength, and sufficient debt servicing capability. The ratings also consider the company's more volatile earnings profile caused by natural catastrophe exposures. Kemper's market position and size/scale are characterized as 'Medium' by Fitch when measured by net written premium and equity, which is consistent with the company's IFS rating.

Kemper's life/health segment (United Insurance Co. of America and its subsidiaries') ratings reflect its continued stable underlying earnings, solid capitalization, and effective niche in the home service market, albeit a slow growth market. The group has been a steady source of capital for Kemper, with dividend capacity to support parent objectives. Fitch views United's ratings as limited by its small size and scale relative to larger, national peers.

Kemper closed on its acquisition of the Alliance United Group (Alliance United), a writer of non-standard auto insurance in California on April 30, 2015. Kemper reported 8 months of Alliance United business in its consolidated results for full-year 2015.

Kemper reported weaker full year operating earnings in 2015 as results in the non-standard auto segment, particularly at Alliance United, were pressured by an increase in loss trends during the year. Kemper reported increased frequency and severity of claims across the non-standard segment. Consolidated operating earnings declined to \\$69.9 million in 2015, down from \\$97.1 million in the prior year.

Kemper reported full-year calendar-year combined ratio that was essentially flat with the prior year at 103.6% in 2015, although the company's underlying loss ratio, excluding catastrophes and reserve development increased to 73.2% from 67.7% in the prior year as the result of the adverse frequency and severity trends. Calendar-year underwriting results benefited from a decline in property/casualty segment catastrophe losses to approximately \\$57 million, down from \\$81 million in the prior year and a lower amount of write-offs related to software that was being developed for internal use.

Total revenue grew by 6.6% to \\$2.3 billion in 2015 as Alliance United added approximately \\$273 million in net premiums earned to Kemper's 2015 results since acquisition. Kemper experienced modest premium declines from its legacy personal lines in 2015, but this decrease was offset by the premiums added by Alliance United. Net investment income declined by 2.1% in 2015, largely as the result of a drop in dividend income received from its equity portfolio relative to the prior year.

Capitalization at the property/casualty operating company level scored 'Strong' on Fitch's proprietary capital model, Prism, based on year-end 2014 data, which is considered consistent with Kemper's 'A-' Insurer Financial Strength rating. Other measures of capital strength also suggest Kemper is strongly capitalized. NAIC risk-based capital ratio for Kemper's legacy property/casualty subsidiaries was approximately 325% of the company action level at year-end 2015. RBC for United Insurance Co. of America was approximately 390% at year-end 2015.

Financial leverage at Dec. 31, 2015 (adjusted for the impact of FAS 115 unrealized gains on fixed-income investments) remained unchanged from the previous year end at 29.4% and remains in line with median guidelines for the current rating category. The GAAP fixed-charge coverage ratio dropped to 2.6x in 2015, largely due to depressed earnings during the year and interest expense that remained level following the issuance of \\$249 million of senior notes in the first quarter of 2015 and the redemption of maturing debt during the year.

The life/health segment reported a sizeable decline in net operating income to \\$72 million in 2015, down from \\$92 million in the prior year. The decline was largely driven by reduced net investment income along with increased legal expenses and a deferred premium reserve adjustment. Underlying profitability in the segment remains stable, as the prior year's results benefited from a \\$14 million special dividend received in the fourth quarter.

RATING SENSITIVITIES
Factors that could lead to an upgrade of Trinity Universal Insurance Co. include:
--Maintaining a Prism score of 'strong';
--Sustained underwriting profit;
--GAAP fixed charge coverage at or above 7x.

Factors that could lead to a downgrade of Trinity Universal Insurance Co. include:
--Statutory fixed charge coverage below 3.5x;
--A combined ratio above 106% for a sustained period;
--Deterioration in capitalization with a p/c Prism capital model score below 'adequate';
--RBC ratio for the p/c entities below 200%;
--Financial leverage ratio that exceeds 30%.

Factors that could lead to an upgrade for the United Insurance Co. and its subsidiaries include:
--Sustained strong profitability with positive movement in Trinity Universal Insurance Co. ratings.

Factors that could lead to a downgrade for the United Insurance Co. and its subsidiaries include:
--A decline in the RBC ratio below 300% of the company action level;
--A sustained decline in profitability resulting in a return on capital below 5%.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings with a Stable Outlook:

Kemper
--IDR at 'BBB';
--\\$359 million senior notes 6% due 2017 at 'BBB-';
--\\$247 million senior notes 4.35% due 2025 at 'BBB-';
--\\$225 million credit facility at 'BBB-';
--\\$144 million subordinated notes due 2054 at 'BB'.

Trinity Universal Insurance Co.
United Insurance Co. of America
Union National Life Insurance Co.
Reliable Life Insurance Co.
--IFS rating at 'A-'.