Business Context and Reporting Period
Company: Unitrin, Inc. (Note: The filing text identifies the registrant as Unitrin, Inc., despite the user prompt referencing "KEMPER Corp." Kemper is a licensed trademark used by Unitrin for its personal lines insurance segment.)
Reporting Period: Fiscal year ended December 31, 2009.
Business Overview: Unitrin is a diversified insurance holding company operating through five segments: Kemper (preferred/standard auto and homeowners), Unitrin Specialty (non-standard auto), Unitrin Direct (direct-to-consumer auto/homeowners), Life and Health Insurance, and Fireside Bank (automobile finance).
Key Developments:
- Acquisitions: Acquired Direct Response Corporation for $201.6 million in February 2009 to expand the Unitrin Direct segment.
- Strategic Exit: Announced in March 2009 a plan to exit the automobile finance business via Fireside Bank, suspending all new lending and entering a wind-down phase.
- Regulatory Environment: Faces potential adverse impacts from U.S. health care reform legislation on its Reserve National subsidiary and new banking regulations affecting Fireside Bank.
Key Financial Metrics
| Metric (in millions) | 2009 | 2008 |
|---|---|---|
| Total Revenues | $2,933.4 | $2,742.2 |
| Net Income | $164.7 | $(29.6) |
| Net Income from Continuing Operations | $162.2 | $(38.0) |
| Earned Premiums | $2,455.5 | $2,376.6 |
| Net Investment Income | $322.7 | $212.9 |
| Net Impairment Losses | $(50.4) | $(152.9) |
| Total Assets | $8,573.5 | $8,818.8 |
| Shareholders' Equity | $1,917.6 | $1,648.6 |
| Property & Casualty Reserves | $1,211.3 | $1,268.7 |
| Catastrophe Losses (Net) | $43.5 | $144.9 |
Material Changes vs. Prior Period
Profitability Turnaround: The Company returned to profitability in 2009 with Net Income of $164.7 million, reversing a Net Loss of $29.6 million in 2008. This improvement was driven by significantly lower catastrophe losses, higher net investment income, and reduced impairment losses.
Catastrophe Losses: Catastrophe losses dropped to $43.5 million in 2009 from $144.9 million in 2008. The 2008 figure was heavily impacted by Hurricanes Dolly, Gustav, and Ike, whereas no major hurricanes significantly impacted the Company in 2009.
Investment Performance: Net Investment Income increased by $109.8 million to $322.7 million, primarily due to a swing from a $76.3 million loss to a $47.7 million gain in Equity Method Limited Liability Investments. Net Impairment Losses decreased significantly to $50.4 million from $152.9 million.
Segment Performance:
- Kemper: Operating profit surged to $86.2 million from $7.6 million, aided by lower catastrophe losses and favorable reserve development.
- Unitrin Direct: Operating loss narrowed to $12.6 million from $52.5 million, though the segment remains unprofitable.
- Fireside Bank: Operating loss improved to $5.3 million from $22.3 million as the bank executed its exit plan, reducing loan originations and expenses.
Guidance, Outlook, and Risks
Outlook:
- Unitrin Direct: Management expects the segment to be profitable for the full year in 2010 following rate increases and risk selection improvements.
- Fireside Bank: The Company expects the bank to record approximately break-even bottom-line results in 2010 as it continues to wind down operations.
- Life and Health: Earned premiums are expected to decline as the segment runs off dwelling coverage to reduce catastrophe exposure.
Key Risks and Contingencies:
- Health Care Reform: Pending legislation could materially adversely affect Reserve National's business model, potentially impacting the recoverability of $14.8 million in goodwill.
- Fireside Bank Exit: Success depends on loan collection performance; a deterioration in the California economy could increase delinquencies and charge-offs.
- Reserve Uncertainty: Property and casualty reserves are subject to significant estimation uncertainty, particularly regarding long-tailed exposures (asbestos, environmental, construction defect).
- Investment Volatility: The Company holds significant investments in distressed and mezzanine debt funds, which are subject to market volatility and economic downturns.
Investor Verification Checklist
- Reserve Adequacy: Verify the stability of the $80.9 million in favorable loss reserve development reported in 2009, particularly within the Kemper segment.
- Fireside Bank Liquidity: Monitor the ratio of Tier 1 capital to total average assets (currently 21.3%) to ensure it remains above the 15% regulatory requirement during the wind-down.
- Health Care Legislation: Track the final provisions of U.S. health care reform to assess the specific impact on Reserve National's revenue and goodwill.
- Investment Portfolio: Review the performance of Equity Method Limited Liability Investments, which contributed significantly to the 2009 income swing.
- Unitrin Direct Profitability: Confirm the segment achieves full-year profitability in 2010 as projected by management.