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, 2006. The company operates through six segments: Unitrin Kemper Auto and Home, Unitrin Specialty, Unitrin Direct, Unitrin Business Insurance, Life and Health Insurance, and Consumer Finance. The filing includes unaudited condensed consolidated financial statements and management discussion.
Key Financial Metrics
| Metric | Nine Months Ended Sept 30, 2006 | Nine Months Ended Sept 30, 2005 | Three Months Ended Sept 30, 2006 | Three Months Ended Sept 30, 2005 |
|---|---|---|---|---|
| Total Revenues | $2,311.6 million | $2,292.2 million | $778.9 million | $754.1 million |
| Net Income | $221.5 million | $168.8 million | $86.1 million | $22.7 million |
| Diluted EPS | $3.23 | $2.42 | $1.27 | $0.32 |
| Net Investment Income | $229.1 million | $209.1 million | $77.8 million | $67.8 million |
| Net Realized Investment Gains | $23.7 million | $53.5 million | $3.1 million | $7.8 million |
| Total Assets | $9,368.5 million | $9,198.3 million (Dec 31, 2005) | - | - |
| Total Debt Outstanding | $504.3 million | $503.6 million (Dec 31, 2005) | - | - |
| Cash and Short-term Investments | $632.9 million | $569.0 million (Dec 31, 2005) | - | - |
Material Changes vs. Prior Period
- Profitability Surge: Net income increased 31% for the nine months ended September 30, 2006, compared to the same period in 2005. This was driven primarily by improved operating results in insurance segments and higher net investment income, partially offset by lower net realized investment gains.
- Investment Gains Decline: Net realized investment gains dropped significantly from $53.5 million in 2005 to $23.7 million in 2006. The 2005 figure included a one-time $39.4 million gain from real estate sales, which did not recur in 2006.
- Catastrophe Losses: Total catastrophe losses and loss adjustment expenses (LAE), net of reinsurance, were $42.9 million for the nine months of 2006, a significant decrease from $87.7 million in 2005. The 2005 period was heavily impacted by Hurricanes Katrina and Rita.
- Segment Performance:
- Unitrin Kemper Auto and Home: Operating profit increased by $77.1 million (nine months) due to lower catastrophe losses and favorable reserve development.
- Life and Health Insurance: Operating profit increased by $38.3 million, driven by higher investment income and gains on office building sales.
- Unitrin Direct: Reported an operating loss of $5.9 million (nine months) compared to a profit of $1.5 million in 2005, due to increased marketing expenses and adverse reserve development.
Outlook, Risks, and Management Commentary
- Reserve Development: Management highlighted favorable loss reserve development of $71.4 million for the nine months ended September 30, 2006. However, they noted that the estimation process is inherently uncertain, particularly for long-tail liabilities and emerging exposures like construction defects.
- Catastrophe Reinsurance: The company renewed its catastrophe reinsurance program for the Unitrin Kemper Auto and Home segment effective July 1, 2006, on terms that are substantially different and more expensive than the prior program. This increased the cost of reinsurance coverage.
- Accounting Changes: The company adopted SFAS No. 123(R) regarding share-based payments effective January 1, 2006. The incremental effect was not material. The company also noted upcoming adoption of FIN 48 (income tax uncertainty) and SFAS 158 (pension accounting) in future periods, with SFAS 158 potentially recognizing a $35.1 million liability for unfunded pension status.
- Liquidity: The company maintains a $325 million revolving credit facility with $311.9 million available. Management believes it has sufficient resources to maintain current dividend levels and refinance maturing debt.
- Forward-Looking Risks: Risks include changes in economic conditions, interest rates, equity prices, the severity of insurance claims (including catastrophes), regulatory actions, and the financial condition of reinsurers.
Key Facts for Investor Verification
- Reserve Adequacy: Verify the stability of the $71.4 million favorable reserve development, particularly in the Unitrin Kemper Auto and Home and Unitrin Business Insurance segments, as future adverse development could materially impact earnings.
- Catastrophe Exposure: Review the specific terms of the new catastrophe reinsurance program for the Auto and Home segment and the potential for reinstatement premiums following future events.
- Investment Portfolio: Monitor the concentration of equity investments in Northrop Grumman Corporation (approx. $739 million of equity securities) and the impact of market volatility on unrealized gains/losses.
- Unitrin Direct Growth: Assess the sustainability of the Unitrin Direct segment's losses as it increases marketing spend to enter new states and grow its book of business.
- Debt Maturity: Note the $300 million 5.75% senior notes due July 1, 2007, and the company's plan to refinance this debt using its shelf registration.