Business Context and Reporting Period
This summary covers the Form 10-Q filed by Unitrin, Inc. (operating under the Kemper brand) for the quarterly period ended June 30, 2008. The company operates through five segments: Kemper, Unitrin Specialty, Unitrin Direct, Life and Health Insurance, and Fireside Bank. The reporting period includes the impact of the April 1, 2008, acquisition of Primesco, Inc. and the June 3, 2008, sale of the Unitrin Business Insurance operations, which are reported as discontinued operations.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2008 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenues | $1,428.4 million | $1,461.1 million |
| Net Income (Loss) | $19.6 million | $134.6 million |
| Income from Continuing Operations | $31.7 million | $126.1 million |
| Net Income Per Share (Diluted) | $0.31 | $2.01 |
| Net Cash Provided by Operating Activities | $63.8 million | $156.3 million |
| Total Assets | $9,433.8 million | $9,405.0 million (Dec 31, 2007) |
| Total Debt Outstanding | $633.4 million | $560.1 million (Dec 31, 2007) |
| Shareholders' Equity | $2,045.0 million | $2,297.8 million (Dec 31, 2007) |
Material Changes vs. Prior Period
- Profitability Decline: Net income dropped significantly from $134.6 million in 2007 to $19.6 million in 2008. Income from continuing operations fell from $126.1 million to $31.7 million.
- Revenue Drivers: Total revenues decreased by $32.7 million. While Earned Premiums increased by $39.5 million (driven by Unitrin Direct and Specialty), this was offset by a $40.7 million decrease in Net Investment Income and a $28.3 million decrease in Net Realized Investment Gains.
- Investment Performance: Net investment income from limited liability investment companies and partnerships swung from a gain of $12.4 million in 2007 to a loss of $28.9 million in 2008. Additionally, the company recorded $26.8 million in pre-tax losses from other-than-temporary declines in fair value of investments.
- Catastrophe Losses: Catastrophe losses from continuing operations increased to $63.3 million (six months 2008) from $20.5 million (six months 2007).
- Discontinued Operations: The company reported a loss of $12.1 million from discontinued operations in 2008, compared to income of $8.5 million in 2007, following the sale of the Unitrin Business Insurance unit.
- Segment Performance:
- Fireside Bank: Reported an operating loss of $25.9 million (vs. profit of $16.3 million in 2007) due to a $39.2 million increase in the provision for loan losses.
- Unitrin Direct: Operating losses widened to $23.3 million (vs. $17.7 million in 2007) due to higher loss ratios and unfavorable reserve development.
- Kemper: Operating profit decreased to $8.7 million (vs. $36.4 million in 2007) primarily due to higher catastrophe losses.
Guidance, Outlook, and Risks
- Capital Resources: Management plans to make additional capital contributions of approximately $75 million to Fireside Bank in the second half of 2008 to increase Tier 1 capital. The company maintains a $325 million revolving credit agreement with $238.9 million available.
- Dividends: Management believes it has sufficient resources to maintain current dividend levels. Direct insurance subsidiaries paid $47.5 million in cash and $25.0 million in stock dividends to the parent in the first half of 2008.
- Investment Risks: The company faces significant exposure to Northrop Grumman (single largest investment) and the residential mortgage industry (Fannie Mae, Freddie Mac). Fair values of preferred stocks in Fannie Mae and Freddie Mac continued to decline in July 2008, though no further write-downs were recorded as of June 30.
- Legal Proceedings: The company is defending class action lawsuits in California regarding Fireside Bank's post-repossession notices and numerous claims related to Hurricanes Katrina and Rita.
- Accounting Changes: The company adopted SFAS No. 157 (Fair Value Measurements) on January 1, 2008, which did not have a material effect on reported fair values but required enhanced disclosures.
Investor Verification Checklist
- Fireside Bank Loan Losses: Verify the adequacy of the $152.2 million reserve for loan losses given the $73.2 million provision and the macroeconomic environment affecting sub-prime auto loans.
- Investment Write-downs: Monitor the status of the $26.8 million in other-than-temporary decline write-downs and the potential for further declines in Fannie Mae and Freddie Mac preferred stocks.
- Catastrophe Exposure: Assess the impact of Hurricane Rita re-opened claims on the Life and Health Insurance segment's reserves.
- Unitrin Direct Loss Ratios: Track the effectiveness of rate increases and underwriting initiatives in the Unitrin Direct segment to reduce the 118.2% combined ratio.
- Primesco Integration: Review the final allocation of the $95.8 million purchase price for the Primesco acquisition, particularly regarding goodwill and insurance reserves.