Fitch Maintains Kemper Insurance Companies on Rating Watch Negative.

Business Editors

CHICAGO--(BUSINESS WIRE)--Dec. 27, 2002

Fitch Ratings announced that it is maintaining its Rating Watch Negative status for the ratings of the Kemper Insurance Companies (KIC). Current ratings assigned include a 'BBB' insurer financial strength (IFS) rating for the three primary insurance companies, and a 'BB-' rating for the surplus notes issued by Lumbermens Mutual Casualty Company (Lumbermens), the lead property-casualty insurance underwriter of the group.

KIC management recently announced that the company has reached an agreement-in-principle with Berkshire Hathaway Inc. subsidiary, National Indemnity Company (which has a 'AAA' IFS rating by Fitch), whereby National Indemnity will provide a cut-through endorsement on policies issued under the agreement beginning Jan. 1, 2003. The company indicated that this cut-through will enable KIC to continue operating its core businesses while restructuring its operations prior to a planned demutualization. In connection with the transaction, KIC will also repurchase for $125 million Berkshire's minority equity investment in a Kemper subsidiary company that was made in 2002. Closing of the transaction is expected in the first quarter of 2003.

Fitch believes that the cut-through was necessitated by recent rating downgrades of Kemper by other peer rating agencies that placed the ratings at approximately the level established by Fitch eight months ago. KIC currently has no ratings in the 'A' category by any major rating firm, which further affects the organization's competitive position.

Fitch is also concerned that the repurchase of the Berkshire investment will adversely impact KIC's capital and liquidity position. Fitch hopes to discuss the nature of the recently announced transactions with KIC management shortly, and will address the Rating Watch position of KIC following these discussions.

In April 2002, Fitch downgraded the Insurer Financial Strength ratings of the Kemper Insurance Companies (KIC) from 'A-' to 'BBB', and the surplus notes rating of Lumbermens from 'BBB-' to 'BB-'. At that time, the ratings were placed on Rating Watch Negative.

The rating actions reflected Fitch's view that there was a material deterioration in the financial profile of the organization, relating primarily to a decline in KIC's capital as reflected by a 30% decline in policyholders' surplus at Lumbermens in 2001 due in large part to reserve increases recorded in the fourth quarter.

In the last 12 months, Kemper management has initiated major strategic changes to address the organization's capital position and operating performance, including implementation of a comprehensive reorganization plan, and executing retroactive reinsurance contracts for surplus relief. Fitch believes that the ultimate success of these changes remains uncertain and that these actions are indicative of an organization that faces operating challenges and has limited financial flexibility, which diminishes the opportunity for KIC to benefit from the continued hardening commercial lines insurance market.

For a more in-depth credit perspective on KIC, please refer to a report published by Fitch in October 2002 on Lumbermans Mutual Casualty Company that is available at 'www.fitchratings.com' in the Highlight Reports section for the Insurance Sector.

Insurer Financial Strength Ratings

--Lumbermens Mutual Casualty Co. no action 'BBB'/Negative;

--American Motorists Insurance Co. no action 'BBB'/Negative;

--American Manufacturers Mutual Ins. Co. no action 'BBB'/Negative;

Surplus Note Rating

--Lumbermens Mutual Casualty Co. no action 'BB-'/Negative

NOTE: The noted ratings were initiated by Fitch as a service to users of Fitch ratings. The ratings are based primarily on public information.