KMPR

Business Context and Reporting Period

This summary covers the Form 10-Q filed by Unitrin, Inc. (operating under the KEMPER brand for personal lines) for the quarterly period ended March 31, 2010. The company operates through five segments: Kemper, Unitrin Specialty, Unitrin Direct, Career Agency, and Fireside Bank. Notably, the health insurance subsidiary, Reserve National, is classified as a discontinued operation following the termination of a sale agreement in April 2010.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Turnaround: The company reported a Net Income of $48.2 million in Q1 2010, a significant improvement from a Net Loss of $5.6 million in Q1 2009. This was driven by higher segment operating results, increased Net Investment Income, and significantly lower impairment losses.
• Investment Performance: Net Investment Income increased by $33.8 million ($79.5M vs $45.7M). This was primarily due to a swing in Equity Method Limited Liability Investments from a loss of $20.3 million in 2009 to income of $9.4 million in 2010.
• Impairment Losses: Net Impairment Losses Recognized in Earnings dropped dramatically to $3.2 million from $25.0 million in the prior year.
• Premium Volume: Earned Premiums decreased by $31.5 million (5.4%) to $549.7 million, reflecting lower volume across all four insurance segments.
• Automobile Finance: Automobile Finance Revenues declined $22.3 million to $30.6 million as Fireside Bank continues its plan to exit the business, having suspended new lending in 2009.

Guidance, Outlook, and Risks

• Discontinued Operations: Negotiations to sell Reserve National were terminated in April 2010. The company has retained an advisor to identify a new buyer. There is a risk that the sale may not result in a complete recovery of the $14.8 million goodwill associated with the unit.
• Health Care Reform: The Patient Protection and Affordable Care Act may adversely impact Reserve National's business model, potentially causing significant revenue loss.
• Fireside Bank Wind-down: The company expects Automobile Loan Receivables and Certificates of Deposits to decline substantially in 2010. Fireside Bank aims to report slightly positive bottom-line results while winding down operations.
• Investment Outlook: The company holds significant exposure to distressed debt and mezzanine debt funds. While 95% of the fixed maturity portfolio is investment-grade, the company notes that investment gains or losses are unpredictable.
• Dividends: The quarterly dividend was increased to $0.22 per share in Q1 2010 (from $0.20 in Q2-Q4 2009). Fireside Bank is considering a dividend request of approximately $75 million for the second half of 2010, subject to regulatory approval.

Investor Verification Checklist

• Reserve National Sale: Verify the status of the search for a new buyer for Reserve National and the potential impact on goodwill impairment if a sale is not achieved.
• Investment Volatility: Review the composition of Equity Method Limited Liability Investments, which drove the majority of the investment income swing year-over-year.
• Fireside Bank Liquidity: Monitor the ratio of Tier 1 capital to total average assets (23.7% at March 31, 2010) and the progress of the loan portfolio run-off against the certificate of deposit maturities.
• Loss Reserve Development: Assess the sustainability of favorable loss reserve development ($11.5 million in Q1 2010) in the Property and Casualty segments.
• Regulatory Capital: Confirm that insurance subsidiaries maintain adequate statutory capital to pay the estimated $106 million in dividends projected for the remainder of 2010.