Unitrin, Inc. Form 10-Q — Quarter Ended June 30, 2011
Entity note: The supplied filing is for Unitrin, Inc., not a registrant named Kemper Corp. It reports “Kemper” as one operating segment. Figures are in millions of dollars unless otherwise noted; the interim statements are unaudited.
Business context and reporting period
Unitrin operated property and casualty, life and health insurance businesses and Fireside Bank, which was winding down its automobile-finance operations. The filing compares the three and six months ended June 30, 2011 with the same periods in 2010.
Financial results and key metrics
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Total revenue | $660.7 | $684.9 | $1,318.1 | $1,379.4 |
| Income (loss) from continuing operations | $(1.5) | $39.1 | $54.3 | $86.8 |
| Net income (loss) | $(0.5) | $37.8 | $53.6 | $86.0 |
| Net income (loss) per unrestricted share | $(0.01) | $0.61 | $0.88 | $1.38 |
| Operating cash flow | Not presented quarterly | $21.2 | $50.0 |
- First-half earned premiums were $1,094.1, down $65.5 year over year. Automobile-finance revenue fell $29.0 as Fireside Bank ran off its loan portfolio. Investment income rose $2.0 to $164.6.
- Net realized investment gains increased to $32.4 for the first half from $7.4 a year earlier, partly offsetting weaker operating results. Net impairment losses were $1.7 versus $8.1.
- Catastrophe losses and loss-adjustment expenses from continuing operations rose to $114.0 for the first half from $43.8; Q2 alone was $104.3 versus $27.8. Spring storms and tornadoes were a principal driver.
- Property-and-casualty reserves developed favorably by $11.9 for the first half, compared with $16.1 favorable development in 2010.
- Segment performance was uneven: Kemper reported first-half net loss of $21.7 (2010 income $28.1); Unitrin Direct lost $8.5 (2010 income $0.5); Unitrin Specialty earned $9.1 (down from $11.8); Life and Health earned $53.6 (up from $47.9); Fireside Bank earned $13.0 (up from $5.7).
- Kemper’s combined ratio was 116.4% for the first half and 132.6% in Q2, versus 97.7% and 98.4%, respectively, in 2010. Its underlying combined ratio was 95.1% for the first half and 93.7% in Q2. Unitrin Direct’s first-half combined ratio was 122.7%; Specialty’s was 101.0%.
- At June 30, total assets were $8,181.9, total liabilities $6,045.7 and shareholders’ equity $2,136.2. Investments totaled $6,173.2; cash was $123.8. Notes payable were $610.2; certificates of deposit had been fully redeemed and were zero at quarter-end.
- First-half investing cash flow was $357.1 and financing cash flow was $(371.7), including $321.8 of certificate-of-deposit repayments, $21.7 of share repurchases and $29.2 of dividends. Cash increased $6.6 to $123.8.
Material changes versus prior comparable periods
- Q2 moved from continuing-operations income of $39.1 to a loss of $1.5, and from net income of $37.8 to a net loss of $0.5. First-half net income declined $32.4 to $53.6.
- Higher catastrophe claims drove the deterioration in Kemper and consolidated results. Kemper’s first-half catastrophe losses were $96.9 versus $38.6 in 2010, and its underlying loss ratio also worsened.
- Premiums declined across Kemper, Specialty and Direct, primarily from reduced policy volume; total earned premiums were down 5.6%. Fireside Bank revenue declined as its loan book ran off.
- Investment gains helped results, while operating cash flow declined $28.8. Investing cash flow rose substantially, reflecting investment sales and $128.5 of short-term investment dispositions; financing outflows increased with accelerated deposit redemptions.
Outlook, management commentary, risks and unusual items
- Kemper expected earned premiums to decrease over the next several quarters as lower policy volume was only partly offset by higher rates. Unitrin Direct expected sequential earned-premium declines through the remainder of 2011; Specialty expected personal-auto policies in force to be flat to marginally lower.
- Fireside Bank was pursuing an orderly exit and expected to surrender its industrial-bank charter by the end of Q1 2012. The company expected Fireside to return at least $265 million of capital to Unitrin after the wind-down process; timing and completion remain risks.
- Unitrin had a $245 million revolving credit agreement expiring October 2012, with no borrowings outstanding. The company reported $47.6 million of cash and investments held directly by the parent, estimated $139 million of subsidiary dividends available without prior regulatory approval for the rest of 2011, and a $300 million share-repurchase authorization. It repurchased $21.7 million of shares in the first half.
- Management noted that insurance results depend on uncertain catastrophe activity, claim severity, reserve estimates, reinsurance and regulatory developments. The filing added a risk concerning a possible U.S. sovereign-debt downgrade, which could reduce investment values, disrupt markets and raise capital requirements.
- Legal proceedings included a significant volume of catastrophe-related property-damage lawsuits in southern coastal states. Management believed resolution would not materially harm consolidated equity, but acknowledged that an adverse outcome could materially affect results in a period; potential loss amounts were not clearly quantified.
- Other notable items: Fireside recorded a negative loan-loss provision of $28.2, primarily from recoveries of previously charged-off loans; a $1.2 impairment related to an exchange-traded fund the company intended to sell; and $4.9 of restructuring expense was incurred in the first half.
Most important facts for investors to verify
- Confirm the registrant and security identity: the supplied 10-Q is filed by Unitrin, Inc.; “Kemper” is a segment in this filing.
- Track catastrophe claims, especially homeowners losses, and subsequent development of property-and-casualty reserves.
- Assess whether premium declines and adverse underlying loss-ratio trends at Kemper and Unitrin Direct improve as pricing and underwriting actions take effect.
- Monitor Fireside Bank’s loan recoveries, remaining wind-down costs, charter surrender and the timing and amount of any capital return.
- Evaluate holding-company liquidity, regulated-subsidiary dividend capacity, debt maturities and whether share repurchases and dividends remain supported by cash generation.
- Review investment valuation and credit exposure, including the sensitivity to interest rates and equity markets, $270.1 of Level 3 assets, and the stated U.S. sovereign-rating risk.