A.M. Best Downgrades Ratings of Kemper.

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--May 1, 2003

A.M. Best Co. has downgraded the financial strength ratings to C++ (Marginal) from B (Fair) of the participants in the Kemper Insurance Companies (Long Grove, IL) inter-company pool, eight reinsured affiliates and one domestic affiliate and removed it from under review. The rating outlook is negative.

Concurrently, A.M. Best has downgraded the debt rating on the $700 million surplus notes to "c" from "ccc+" issued by Lumbermens Mutual Casualty Company (LMC) (Long Grove, IL), the lead member of the inter-company pool, as it has technically defaulted on the interest payments of the surplus notes. The Illinois Department of Insurance has denied LMC's request to make the interest payments due in June and July of 2003.

The downgrading of the Kemper ratings is a result of its marginal capitalization, weak cash flows and reduced overall liquidity position. Additionally, the ratings acknowledge that at year-end 2002, LMC's risk-based capital fell within the Authorized Control Level. Kemper's surplus deteriorated by more than 60% over the last two years, driven largely by poor operating results, significant capital losses and minimum pension liability charges.

A component of Kemper's strategic plan for run-off included the sale of three subsidiary companies and renewal rights to its middle market business. In March 2003, Kemper received a letter of intent from third-party investors to purchase the subsidiaries and renewal rights but subsequently announced on April 24, 2003, that the parties involved had discontinued negotiations towards a definitive agreement. Kemper anticipated receiving gains or earnings benefits associated with the sale of certain subsidiaries, renewal rights commissions and shared services fees. The failure of the transaction changes the dynamics of the run-off plan, and leverage remains high.

The sale of certain renewal rights to other various lines of business, the discounted cash tender offer on the $700 million outstanding surplus notes at LMC and the required repurchase of Berkshire Hathaway's minority equity investment in Kemper Insurance Group, Inc., (KIG) for $125 million, have further weakened Kemper's cash flow and overall liquidity positions.

Finally, Kemper has continued exposure to potential adverse loss reserve development, ability to collect reinsurance recoverables from providers in a customary manner following its announced run-off and capitalization further weakens when considering currently identified additional capital commitments of LMC. Further, LMC has indicated it anticipates its independent auditor will issue a "going concern" opinion in its 2002 Independent Auditor's report on LMC.

Also, A.M. Best has downgraded the financial strength ratings to B (Fair) from B+ (Very Good) of the Eagle Insurance Group (Washington). These ratings remain under review with negative implications. Although policyholders' surplus has not changed, the downgrade is based on the pool's weakened capitalization given its above average dependence on reinsurance recoverables and the lower credit quality of LMC. This was derived from the 80% quota share reinsurance arrangement with LMC, which terminated January 1, 2003. The review will focus on its pending successful and timely conclusion of capital enhancement efforts. Kemper plans to establish a collateralized trust for recoverables from Lumbermens and is marketing the Eagle Group for sale. Although there is currently no definitive sale agreement, these factors combined would enable A.M. Best to consider a Secure rating for the Eagle Group.

For a complete listing of Kemper Insurance Companies' financial and debt ratings please visit http://www.ambest.com/press/050102kemper.pdf.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.