Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 1999, for Unitrin, Inc. (Note: The request metadata references "KEMPER Corp," but the filing text explicitly identifies the registrant as Unitrin, Inc.). The company operates through three primary segments: Property and Casualty Insurance, Life and Health Insurance, and Consumer Finance. The financial statements are unaudited and reflect a 2-for-1 stock split effective March 26, 1999, with prior year per-share amounts restated accordingly.
Key Financial Metrics
| Metric | Q1 1999 | Q1 1998 |
|---|---|---|
| Total Revenues | $427.4 million | $420.9 million |
| Net Income | $52.2 million | $76.0 million |
| Net Income Per Share (Diluted) | $0.70 | $1.00 |
| Operating Cash Flow | ($7.0) million | $65.6 million |
| Total Assets | $5,969.6 million | $5,909.9 million |
| Shareholders' Equity | $1,860.5 million | $1,822.4 million |
| Notes Payable | $51.1 million | $116.2 million |
| Cash and Equivalents | $6.4 million | $8.6 million |
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased by $23.8 million (31%) to $52.2 million. This was primarily driven by a significant reduction in Net Gains on Sales of Investments, which fell from $60.9 million in Q1 1998 to $24.3 million in Q1 1999.
- Investment Gains: The 1998 period included large gains from the disposition of ITT Corporation stock and Navistar preferred stock. The 1999 period included a $24.5 million gain from the sale of a portion of the Baker Hughes investment.
- Segment Performance:
- Property & Casualty: Premiums decreased $24.6 million due to management actions to reduce exposure on certain business classes. Operating profit dropped $4.7 million due to higher storm damage and lower volume.
- Life & Health: Premiums increased $58.9 million, driven by acquisitions of The Reliable Life Insurance Company and Reserve National Insurance Company in 1998. Operating profit increased $5.0 million.
- Consumer Finance: Revenues increased slightly ($0.8 million), but operating profit decreased $0.9 million due to higher expenses, including Year 2000 conversion costs.
- Cash Flow: Operating cash flow turned negative ($7.0 million used) compared to $65.6 million provided in the prior year, largely due to changes in working capital and the timing of investment gains.
- Capital Allocation: The company repurchased 2.8 million shares of common stock for $94.8 million during the quarter.
Outlook, Risks, and Unusual Items
- Acquisition Activity: On February 10, 1999, Unitrin entered an agreement to acquire Valley Group, Inc. (a subsidiary of Fund American) for an estimated $139 million. Closing is expected in Q2 1999, subject to regulatory approvals.
- Year 2000 (Y2K) Compliance:
- The company is actively managing a four-phase Y2K program. Property & Casualty is substantially complete. Life & Health is 90% complete. Consumer Finance relies on third-party vendor Fiserv, which has migrated to a compliant system.
- Incremental Y2K expenses were $1.8 million for the quarter, with an estimated $0.6 million remaining for the rest of 1999. Capital expenditures for hardware/software replacement are estimated at $16 million.
- Risk: Management warns that failure of internal systems, service providers, or investees (Litton, Curtiss-Wright, UNOVA, Baker Hughes) to achieve compliance could materially adversely affect operations and financial results.
- Accounting Changes: Adopted SOP No. 98-1 regarding computer software costs (effect not material). SFAS No. 133 (Derivatives) is expected to be adopted in 2000 with no material effect anticipated.
- Liquidity: The company has $295.0 million in unused revolving credit facility capacity. Subsidiaries can pay approximately $624.9 million in dividends without prior regulatory approval.
Investor Verification Checklist
- Verify the closing status and regulatory approval of the Valley Group acquisition and its impact on Q2 1999 results.
- Monitor the Year 2000 compliance status of key third-party vendors (specifically Fiserv) and investee companies (Litton, Baker Hughes), as Unitrin has no control over their remediation.
- Assess the sustainability of investment gains, noting that Q1 1999 results were bolstered by a specific sale of Baker Hughes stock, whereas Q1 1998 gains were from one-time dispositions.
- Review the Property & Casualty segment strategy regarding reduced exposure, as management anticipates continued premium volume impacts in 1999.
- Confirm the impact of the 2-for-1 stock split on share count and per-share metrics in future filings.