Kemper has been on the brink of insolvency for years.  It may have finally reached the end of its runway.  Last week, Kemper disclosed its most recent financials, which show that very little cash is left in its two major member companies, raising the specter that it may finally be placed into a liquidation proceeding.  Policyholders should be aware of the ramifications of a Kemper liquidation and take steps, if possible, to mitigate the impact a Kemper liquidation could have on their businesses.

Kemper has been operating under a run-off plan administered by the Illinois Department of Insurance since 2004.  Its cash position has fluctuated significantly during that time.  Unable to generate premium income from the issuance of new policies, Kemper has depended to a large extent on policy buy-backs to free up cash reserves.  As a result, we’ve seen Kemper come close to the brink of insolvency before, but bounce back after freeing up cash through large buy-back deals. As a result, a weak cash position will not necessarily lead to a liquidation.

But Kemper’s year-end financials for 2009 indicate that it is perilously close to the edge of the proverbial cliff.  Lumbermens Mutual Casualty Company, Kemper’s largest member company, has only about $8 million in policyholder surplus available, down from just over $113 million one year ago.  Kemper’s other large member company, American Manufacturers Mutual Insurance Company, reported a policyholder surplus of only about $11 million.  Since these numbers were reported, we’ve noticed a considerable increase in chatter suggesting that Kemper may be in its final days.

A Kemper liquidation could significantly affect insureds with policies issued by Kemper member companies, such as Lumbermens, American Manufacturers and others.  Insurers are not subject to the federal bankruptcy laws.  Rather, the liquidation of an insolvent insurer is governed by the law of the state in which it is located.  Kemper is an Illinois insurer.  Therefore, the Illinois Department of Insurance (“DOI”) would file a petition to liquidate the company in Illinois state court, initiating a liquidation proceeding administered in large part by the Illinois DOI.  A bar date would be set for the filing of claims in the liquidation proceeding.  The Illinois DOI would then farm out policyholder claims to insurance guaranty associations in the states in which the claims arose.

Most states have established insurance guaranty associations to act as a safety net against insurer insolvencies.  But they are creatures of statute and provide varying types and amounts of protection to insureds.  Many do not cover bond or reinsurance obligations, and they may not provide any protection to the extent any “other insurance” is available to pay the claim.  Additionally, many states cap the amount of any claims that their insurance guaranty associations may pay.  For example, the California Insurance Guarantee Association (“CIGA”) may pay only $500,000 per claim.  Also, some states bar insureds with high “net worths” from obtaining any insurance guaranty association benefits.

Given the limited recovery available in a liquidation, policyholders should evaluate whether such claims can be resolved now, even at discount.  Kemper may entertain such agreements since it could improve its balance sheet by removing reserves.  Thus, it is vital for policyholders to evaluate their risks in a Kemper liquidation on a state-by-state basis and develop a strategy to mitigate those risks.  We have done this for a number of clients and have been able to creatively reduce their exposure.