Business Context and Reporting Period
Company: Unitrin, Inc. (doing business as Kemper Corp)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2007
Overview: Unitrin operates through six segments: Kemper, Unitrin Specialty, Unitrin Direct, Unitrin Business Insurance, Life and Health Insurance, and Consumer Finance. The company provides property and casualty insurance, life and health insurance, and consumer finance services. During the period, the company completed the acquisition of Merastar Industries, Ltd. for $47.8 million and issued $360 million in senior notes.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2007 |
Six Months Ended June 30, 2006 |
Three Months Ended June 30, 2007 |
Three Months Ended June 30, 2006 |
|---|---|---|---|---|
| Total Revenues | $1,557.2 million | $1,532.7 million | $782.1 million | $773.2 million |
| Net Income | $134.6 million | $135.4 million | $62.2 million | $69.4 million |
| Diluted EPS | $2.01 | $1.97 | $0.94 | $1.01 |
| Net Cash from Operating Activities | $156.3 million | $167.2 million | N/A | N/A |
| Total Assets | $9,757.6 million | $9,321.4 million (Dec 31, 2006) | N/A | N/A |
| Total Debt Outstanding | $860.0 million | $504.5 million (Dec 31, 2006) | N/A | N/A |
| Shareholders' Equity | $2,295.2 million | $2,284.0 million (Dec 31, 2006) | N/A | N/A |
Material Changes vs. Prior Period
- Net Income: Decreased slightly for the six months ended June 30, 2007 ($134.6M vs $135.4M) and for the three months ($62.2M vs $69.4M). The decline was driven by lower operating results in aggregate segments and lower equity income from investees, partially offset by higher net realized investment gains.
- Revenues: Total revenues increased by $24.5 million for the six-month period. This was driven by a $18.1 million increase in Net Investment Income (due to Northrop Grumman dividends and a one-time IRI dividend) and a $18.9 million increase in Net Realized Investment Gains. Earned Premiums decreased by $21.6 million due to declines in the Kemper, Unitrin Business Insurance, and Life and Health segments.
- Segment Performance:
- Kemper: Operating profit decreased significantly ($36.4M vs $66.3M) due to higher incurred losses and lower favorable reserve development.
- Life and Health: Operating profit increased substantially ($86.7M vs $55.5M) due to higher investment income and lower policyholder benefits.
- Unitrin Direct: Reported an operating loss of $17.7M (vs loss of $2.3M) due to increased marketing expenses and higher loss ratios.
- Consumer Finance: Operating profit declined ($16.3M vs $27.5M) due to higher provisions for loan losses and interest expenses.
- Debt: Total debt increased from $504.5 million to $860.0 million following the issuance of $360 million in 6.00% Senior Notes in May 2007.
Guidance, Outlook, and Risks
- Acquisition Integration: The company acquired Merastar Industries, Ltd. on June 29, 2007. Results will be included in the Unitrin Direct segment starting in the third quarter of 2007.
- Strategic Alternatives: Management continues to explore strategic alternatives for the Unitrin Business Insurance segment due to challenges in reaching economies of scale in a competitive market.
- Coastal Exposure Reduction: The Kemper and Life and Health segments are reducing exposures to natural disasters in coastal areas, which is expected to decrease earned premiums by approximately $12-$13 million for Kemper and $5 million for Life and Health in 2007.
- Unitrin Direct Outlook: Direct marketing initiatives are expected to result in operating losses for the next several years as the segment builds volume.
- Accounting Changes: The company adopted FIN 48 (Accounting for Uncertainty in Income Taxes) on January 1, 2007, with no effect on shareholders' equity. The company also recognized the impact of Intermec's adoption of SFAS No. 158 (Pension Accounting), reducing equity by $2.3 million.
- Risks: Key risks include the number and severity of insurance claims (including catastrophes), changes in reinsurance pricing, interest rate fluctuations affecting investment portfolios, and regulatory changes.
Investor Verification Checklist
- Investment Income Volatility: Verify the sustainability of Net Investment Income, which was boosted by a one-time $5.2 million dividend from IRI Holdings and timing of Northrop Grumman dividends.
- Loss Reserve Adequacy: Review the "Critical Accounting Estimates" section regarding the shift in reliance on actuarial indications for current accident year reserves, which may impact future earnings volatility.
- Unitrin Direct Losses: Monitor the trajectory of operating losses in the Unitrin Direct segment as marketing spend increases to drive growth.
- Debt Refinancing: Confirm the repayment of the $300 million 5.75% Senior Notes scheduled for July 2, 2007, using proceeds from the new 6.00% Senior Notes.
- Merastar Integration: Assess the financial impact of the Merastar acquisition in the third quarter of 2007.