Business Context and Reporting Period
Company: Unitrin, Inc. (doing business as Kemper Corp)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Six and three months ended June 30, 2009
Business Overview: Unitrin operates through five segments: Kemper (personal auto/homeowners), Unitrin Specialty (non-standard auto), Unitrin Direct (direct-response auto/homeowners), Life and Health Insurance, and Fireside Bank (sub-prime auto finance). The company is currently executing a plan to exit the automobile finance business via Fireside Bank, which suspended new lending in March 2009. The company also completed the acquisition of Direct Response Corporation in February 2009.
Key Financial Metrics
| Metric (in millions) | Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
Three Months Ended June 30, 2009 |
Three Months Ended June 30, 2008 |
|---|---|---|---|---|
| Total Revenues | $1,451.9 | $1,437.6 | $763.3 | $745.7 |
| Net Income | $36.3 | $26.2 | $41.9 | $11.0 |
| Income from Continuing Ops | $35.1 | $37.7 | $41.4 | $17.0 |
| Net Investment Income | $141.4 | $127.3 | $94.4 | $81.4 |
| Net Impairment Losses (OTTI) | $(34.7) | $(26.8) | $(9.7) | $(18.3) |
| Operating Cash Flow | $86.9 | $63.8 | N/A | N/A |
| Total Assets | $8,724.9 | $8,818.8 | N/A | N/A |
| Total Liabilities | $7,031.3 | $7,170.2 | N/A | N/A |
| Shareholders' Equity | $1,693.6 | $1,648.6 | N/A | N/A |
| Cash and Equivalents | $97.2 | $184.2 | N/A | N/A |
Material Changes vs. Prior Period
- Profitability: Net Income increased 38.5% for the six months ended June 30, 2009, compared to the same period in 2008. This was driven by a significant improvement in Segment Net Income ($30.4 million increase) and lower impairment losses in the quarter, partially offset by lower realized investment gains.
- Revenue Mix: Earned Premiums increased $66.6 million (5.7%) year-over-year for the six-month period, driven by growth in Unitrin Specialty, Unitrin Direct, and Kemper segments. Conversely, Automobile Finance Revenues decreased $25.2 million due to the strategic exit from the auto finance business.
- Investment Performance: Net Investment Income rose $14.1 million, primarily due to higher income from limited partnerships and limited liability companies. However, Net Realized Gains on Sales of Investments dropped significantly from $38.0 million in 2008 to $5.2 million in 2009, largely due to the absence of sales from the Northrop Grumman investment portfolio.
- Impairments: Net Impairment Losses Recognized in Earnings increased to $34.7 million for the six months ended June 30, 2009, compared to $26.8 million in 2008, reflecting other-than-temporary declines in investment fair values.
- Discontinued Operations: The company reported income from discontinued operations of $1.2 million for the six months ended June 30, 2009, compared to a loss of $11.5 million in the prior year period.
Guidance, Outlook, and Risks
- Fireside Bank Exit: Fireside Bank has suspended new lending and is winding down operations. The company expects the segment to record approximately break-even results for the remainder of 2009. Future restructuring costs are estimated between $6.0 million and $11.0 million (after-tax) over the next several years.
- Unitrin Direct Strategy: The segment is moderating marketing spending and reducing staff by approximately 30% in 2009 to improve operating efficiency. While operating results are expected to improve, the segment is not anticipated to be profitable in 2009 due to losses from the Direct Response acquisition.
- Life and Health Segment: The segment is reducing catastrophe exposure by non-renewing dwelling coverage in coastal areas. Management expects home office expenses to decrease in the remainder of 2009 following the consolidation of Primesco operations.
- Goodwill Impairment: The company recognized a $1.5 million charge to write off goodwill related to the Direct Response acquisition. Goodwill for the Life and Health segment includes $14.8 million related to Reserve National, which faces potential risks from federal healthcare reform initiatives.
- Liquidity: The company has a $325 million revolving credit agreement with $311.9 million available. Management expects to negotiate a new agreement in Q3 2009 with commitments between $200 million and $325 million.
- Legal Contingencies: The company is defending numerous lawsuits related to hurricanes (Katrina, Rita, Ike) and Fireside Bank post-repossession notices. Management believes resolution will not have a material adverse effect on financial position, though outcomes are unpredictable.
Investor Verification Checklist
- Fireside Bank Wind-down: Verify the progress of the loan portfolio reduction and the adequacy of the reserve for loan losses given the sub-prime nature of the portfolio and California unemployment rates.
- Investment Portfolio Quality: Review the composition of fixed maturities and equity securities, specifically the $123.2 million in unrealized losses on fixed maturities and the assessment of "other-than-temporary" impairments.
- Direct Response Integration: Monitor the integration of Direct Response operations and the timeline for achieving profitability in the Unitrin Direct segment.
- Healthcare Reform Impact: Assess the potential impact of federal healthcare reform proposals on Reserve National's business model and the recoverability of its associated goodwill.
- Catastrophe Reserves: Evaluate the adequacy of property and casualty insurance reserves, particularly regarding pending legal matters related to recent hurricanes.