Business Context and Reporting Period
This summary covers the Form 10-Q filed by Unitrin, Inc. (doing business as Kemper Corp) for the quarterly period ended September 30, 2008. The company operates through five segments: Kemper, Unitrin Specialty, Unitrin Direct, Life and Health Insurance, and Fireside Bank. The reporting period was significantly impacted by the financial crisis, severe weather events (Hurricanes Dolly, Gustav, and Ike), and the sale of its Unitrin Business Insurance operations.
Key Financial Metrics
| Metric | Nine Months Ended Sept 30, 2008 | Nine Months Ended Sept 30, 2007 | Three Months Ended Sept 30, 2008 | Three Months Ended Sept 30, 2007 |
|---|---|---|---|---|
| Total Revenues | $2,117.3 million | $2,196.5 million | $688.9 million | $735.4 million |
| Net Income (Loss) | $(19.7) million | $198.9 million | $(39.3) million | $64.3 million |
| Net Income (Loss) Per Share | $(0.31) | $3.02 | $(0.63) | $0.99 |
| Net Cash Provided by Operating Activities | $114.4 million | $229.3 million | N/A | N/A |
| Total Assets | $9,210.6 million | $9,405.0 million | N/A | N/A |
| Total Shareholders' Equity | $1,798.6 million | $2,297.8 million | N/A | N/A |
| Total Debt Outstanding | $560.6 million | $560.1 million | N/A | N/A |
Material Changes vs. Prior Period
- Net Loss vs. Profit: The company reported a net loss of $19.7 million for the nine months ended September 30, 2008, a sharp decline from a net income of $198.9 million in the same period in 2007. The third quarter alone saw a net loss of $39.3 million compared to income of $64.3 million in Q3 2007.
- Investment Losses: Net realized investment losses were $33.4 million for the nine months of 2008, compared to gains of $52.0 million in 2007. This was driven by $98.9 million in pre-tax losses from "other than temporary" declines in fair value, primarily affecting financial institution securities (Fannie Mae, Freddie Mac, Lehman Brothers, AIG, Washington Mutual).
- Catastrophe Losses: Catastrophe losses and loss adjustment expenses (LAE) net of reinsurance were $146.4 million for the nine months of 2008, compared to $27.8 million in 2007. This increase was primarily due to Hurricanes Dolly, Gustav, and Ike.
- Discontinued Operations: The company sold its Unitrin Business Insurance operations in June 2008. Results from this segment are now reported as discontinued operations, contributing a loss of $7.7 million for the nine months of 2008.
- Acquisition: The company acquired Primesco, Inc. in April 2008 for $95.5 million, adding to the Life and Health Insurance segment.
Guidance, Outlook, and Risks
- Investment Outlook: Management anticipates reporting a net investment loss of $8.7 million in Q4 2008 from limited liability investment companies, compared to income of $5.5 million in Q4 2007, due to a reporting lag.
- Unitrin Direct Strategy: The Unitrin Direct segment plans to moderate marketing spending in 2009, expecting earned premiums to remain flat or slightly decline for the remainder of 2008 and 2009. The segment also announced a plan to reduce staffing by approximately 15% by year-end.
- Fireside Bank: The company is exploring strategic alternatives for Fireside Bank. Loan originations are expected to decline in Q4 2008 due to reduced competition and eliminated business segments. The bank recently received a $60 million capital contribution to maintain regulatory capital ratios.
- Key Risks:
- Catastrophe Exposure: Continued uncertainty regarding ultimate costs of Hurricane claims and potential future catastrophes.
- Investment Volatility: Significant exposure to financial sector equities and fixed maturities, with potential for further write-downs if market conditions do not normalize.
- Loan Losses: Fireside Bank faces elevated default risks in its sub-prime auto loan portfolio, requiring increased provisions for loan losses.
- Reinsurance: Risk that reinsurers may not meet obligations, impacting liquidity.
Investor Verification Checklist
- Catastrophe Reserve Adequacy: Verify the stability of loss reserves related to Hurricanes Dolly, Gustav, and Ike, noting the inherent uncertainty in ultimate claim costs.
- Investment Write-downs: Review the specific composition of the $98.9 million in "other than temporary" impairment charges and the remaining exposure to distressed financial institutions.
- Fireside Bank Capitalization: Monitor the Tier 1 capital ratio and the impact of the recent $60 million capital contribution on the bank's ability to sustain operations without further parent support.
- Discontinued Operations: Confirm the final accounting for the sale of Unitrin Business Insurance and any retained liabilities.
- Direct Response Acquisition: Track the progress of the proposed $220 million acquisition of Direct Response Corporation, scheduled to close in Q1 2009.