KMPR

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, 2007. The company operates in property and casualty insurance, life and health insurance, and consumer finance. A significant strategic development during the period was the agreement to sell its Unitrin Business Insurance operations to AmTrust Financial Services, Inc., classifying these results as discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Decline: Net Income decreased by 10.2% for the nine months and 25.3% for the three months compared to the prior year. Income from Continuing Operations declined primarily due to lower operating results in insurance segments and reduced equity income from investees, partially offset by higher net realized investment gains.
• Investment Gains: Net Realized Investment Gains increased significantly to $52.0 million (nine months) and $12.5 million (three months), driven largely by sales of Northrop Grumman common stock.
• Segment Performance:
  • Kemper: Operating profit decreased due to higher incurred losses and lower favorable reserve development, despite lower catastrophe losses.
  • Unitrin Direct: Reported an operating loss of $25.0 million (nine months) due to increased marketing expenses associated with growth initiatives and the acquisition of Merastar.
  • Life and Health: Operating profit increased by $23.2 million (nine months) driven by higher net investment income and lower policyholder benefits.
  • Consumer Finance: Operating profit dropped significantly due to a $27.6 million increase in the provision for loan losses.
• Debt Refinancing: The company issued $360 million of 6.00% Senior Notes due 2017 and used proceeds to repay $300 million of maturing 5.75% Senior Notes.

Guidance, Outlook, and Risks

• Discontinued Operations: The sale of Unitrin Business Insurance to AmTrust is expected to close in 2008. The company will retain $367.0 million in property and casualty reserves for unpaid losses incurred prior to the sale.
• Strategic Initiatives: Unitrin Direct is implementing direct marketing initiatives expected to result in operating losses for the next several years as it builds policy volume. The company is also combining Merastar operations with Unitrin Direct to achieve economies of scale.
• Reserving Strategy: Management is placing greater reliance on actuarial indications for loss reserves, resulting in a decrease in the buffer between recorded reserves and actuarial indications.
• Risks: Key risks include the severity of catastrophe losses, changes in reinsurance pricing, the adequacy of loss reserves, and the impact of interest rate fluctuations on investment portfolios. The company holds significant equity in Northrop Grumman, exposing it to market volatility in that sector.

Investor Verification Checklist

• Discontinued Operations Sale: Verify the closing status of the Unitrin Business Insurance sale to AmTrust and the final valuation of retained liabilities.
• Loss Reserve Adequacy: Review the trend in loss and LAE reserve development, particularly in the Kemper and Unitrin Direct segments, given the shift toward relying more heavily on actuarial indications.
• Consumer Finance Credit Quality: Monitor the provision for loan losses and net charge-off rates in the Consumer Finance segment, which saw a sharp increase in provisions.
• Investment Portfolio: Assess the impact of continued sales of Northrop Grumman stock on future realized gains and the concentration risk of remaining holdings.
• Unitrin Direct Turnaround: Track the timeline for Unitrin Direct to achieve profitability following increased marketing spend and the Merastar integration.