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Kemper runoff saga nearing conclusion

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LONG GROVE, Ill.—Six years after it entered runoff, Kemper Insurance Cos. may be close to the next stage of its windup—liquidation.

The Long Grove, Ill.-based insurer, which has been in voluntary runoff since 2004, earlier this month revealed a steep decline in its surplus, which several observers say indicates that liquidation is near.

But that may be preferred by some policyholders who have been wary of settling liabilities with Kemper without full knowledge of its settlement strategy, which they say has been veiled by the confidential nature of the runoff, some observers note.

In financial statements filed March 1, Kemper reported that its lead insurance unit, Lumbermens Mutual Casualty Co., had a surplus of $8.1 million as of Dec. 31, 2009, a drop from about $113.2 million a year earlier.

Kemper's American Manufacturers Mutual Insurance Co. unit reported surplus of $11.2 million at the end of 2009, relatively unchanged from a year earlier. Lumbermens reinsures American Manufacturers, sources said.

The Illinois Department of Insurance approved Kemper's runoff in 2004. Details of the runoff operations under the department's supervision have been kept confidential.

But with Kemper's operating expenses running at about $5 million a month and its surplus nearing depletion, a liquidation order is expected this year, several sources said.

“Based on their financial statement, it looks like it is imminent,” said Francine L. Semaya, an insurance insolvency expert at Nelson Levine de Luca & Horst L.L.C. in New York and immediate past president of the International Assn. of Insurance Receivers.

For commercial policyholders, that means time is running out to negotiate “disengagement transactions” prior to liquidation, said Len Churnetski, chief operating officer in New York for the national casualty practice of Chicago-based Aon Corp.

“Our assessment is that the window for any transaction probably will close in the next two to three months,” said Mr. Churnetski, who added that Kemper's surplus has dwindled in part because of an unfavorable reinsurance recovery ruling late last year.

Disengagement transactions release Kemper from liability for paying its insureds' claims and include strategies called insurance policy buybacks (see related story).

Kemper representatives did not return several phone calls seeking comment.

The Illinois Department of Insurance issued a statement saying only that it continuously monitors Kemper's status, and that the runoff is the largest in U.S. history and “serves the best interests of policyholders and claimants.”

Several observers agree Kemper runoff operations have been orderly and successful for the array of disengagement options the insurer has made available to policyholders over six years.

“Regardless of if and when Kemper goes into liquidation, what makes this runoff so remarkable is the disengagement transactions and the opportunity for transactional alternatives,” said Corinne P. Carr, an insurance regulatory expert and chair of the risk management subgroup at Sonnenschein Nath & Rosenthal L.L.P. in Chicago.

Kemper has about $1.12 billion in remaining claims liabilities and $943 million in cash and investments, which is sufficient capital to pay its outstanding liabilities over time, said Mr. Churnetski, who produces a quarterly alert on Kemper operations for Aon staff.

Shortly before it went in to runoff, however, Illinois allowed Kemper to discount its liabilities by reducing the amount of loss reserves on its books to account for interest that it would eventually earn on those reserves. The arrangement allowed Kemper to add $1 billion in policyholder surplus to Lumbermens at year-end 2003 (BI, March 15, 2004).

The discounting arrangement is unusual but the practice helped the insurer remain solvent. Otherwise, it would have gone into liquidation years ago, Mr. Churnetski added.

Kemper had about $5 billion in outstanding liabilities in 2003, he added.

The liabilities have “gone down almost $4 billion,” Mr. Churnetski said. “This has to be one of the most successful runoffs in history.”

While the runoff has been impressive in terms of reducing the number of Kemper policies outstanding, some policyholders have declined to settle because Kemper's offers “were so far below what the policyholders felt they were entitled to,” said Mary Cannon Veed, a partner and insurer insolvency expert at Arnstein & Lehr L.L.P. in Chicago.

While Kemper still has enough money to pay claims, at least on paper, “it's not a very comfortable margin,” Ms. Veed said.

Dealings with the insurer have been difficult because of the confidential runoff, Ms. Veed said. Policyholders are not given certain information, such as how much Kemper has reserved for their claims or how much other policyholders have obtained in settlements, she said.

Attorneys estimate Kemper has been settling for between 25 cents and 50 cents on the dollar for a policyholder's claim loss reserves.

“They say in effect, "Make us an offer for how much less than we owe you, you would accept,'” Ms. Veed said. “You are bidding against yourself and that is unfair.”

Rather than settling with Kemper, some policyholders are waiting until a liquidation order is issued, several sources said.

A decision to wait for liquidation or settle beforehand should depend on a cost benefit analysis that includes evaluating whether state guaranty funds for workers compensation claims are likely to pay for the majority of a policyholder's claims, several experts said.

Workers comp claims account for the largest portion of Kemper's outstanding liabilities, totaling about $600 million, Ms. Veed said.

But some states have net-worth exclusions, which eliminate guaranty fund coverage for companies above certain net worth levels, which range from $10 million to $50 million depending on the state, several sources said.

Meanwhile, several Kemper disengagement deals that could remove blocks of commercial claims from Kemper's books remain in the works, Mr. Churnetski said.

Closing such deals would allow Kemper to increase its surplus. But those deals are thinning out in contrast with the number arranged earlier in the runoff, sources said.