Business Context and Reporting Period
Company: Unitrin, Inc. (Note: Metadata referenced "KEMPER Corp," but the filing text identifies the registrant as Unitrin, Inc., which operates the Kemper segment among others).
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 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 the wind-down of Fireside Bank.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $688.6 million | $691.9 million |
| Net Income (Loss) | $(5.6) million | $15.2 million |
| Income (Loss) from Continuing Ops | $(6.3) million | $20.7 million |
| Net Cash Provided by Operating Activities | $26.6 million | $51.3 million |
| Total Assets | $8,882.1 million | $8,818.8 million (Dec 31, 2008) |
| Total Shareholders' Equity | $1,564.7 million | $1,648.6 million (Dec 31, 2008) |
| Debt Outstanding | $665.9 million | $560.8 million (Dec 31, 2008) |
| Combined Ratio (Kemper Segment) | 95.4% | 98.3% |
Material Changes vs. Prior Period
- Profitability Decline: The company reported a net loss of $5.6 million in Q1 2009, a reversal from a net income of $15.2 million in Q1 2008. This was driven by a $27.4 million swing in realized investment gains/losses and lower operating results in the Fireside Bank and Unitrin Specialty segments.
- Investment Losses: Net Realized Investment Gains (Losses) turned from a $6.2 million gain in 2008 to a $24.2 million loss in 2009. This included $25.0 million in losses from other-than-temporary impairments (OTTI) on fixed maturities and equity securities.
- Acquisition Activity: On February 13, 2009, the company acquired Direct Response Corporation for $201.6 million. Results are included in the Unitrin Direct segment.
- Segment Performance:
- Kemper: Operating profit increased to $13.0 million (from $8.7 million) due to favorable loss reserve development.
- Fireside Bank: Operating loss widened to $5.2 million (from $4.4 million) due to lower loan originations and $5.4 million in restructuring charges related to the exit plan.
- Unitrin Direct: Operating loss narrowed to $8.5 million (from $9.9 million) excluding the impact of the Direct Response acquisition.
- Debt Levels: Total debt increased by $105.1 million to $665.9 million, primarily due to borrowings under the revolving credit agreement to fund the Direct Response acquisition and general corporate purposes.
Guidance, Outlook, and Risks
- Fireside Bank Exit: On March 24, 2009, Fireside Bank suspended all new lending and ceased opening new CD accounts. The company expects to incur additional restructuring costs of $14 million to $21 million over the next several years. The company does not anticipate the segment will be profitable in 2009.
- Unitrin Direct Outlook: The segment expects to reduce staffing by 25% and close office locations in 2009. While initiatives are expected to improve operating results, the segment is not expected to be profitable in 2009.
- Investment Portfolio: The company holds significant exposure to government-sponsored enterprises (Ginnie Mae, Fannie Mae, Freddie Mac) and perpetual preferred stocks of financial institutions. Management currently views unrealized losses on these securities as temporary, but notes that future stress tests or capital requirements for issuers could trigger other-than-temporary impairment charges.
- Legal Contingencies: The company is defending numerous lawsuits related to Hurricanes Katrina, Rita, and Ike, as well as class actions regarding Fireside Bank's post-repossession notices. Management believes outcomes will not have a material adverse effect on financial position, though results for a given period could be impacted.
Investor Verification Checklist
- Investment Impairments: Verify the stability of the $208.8 million in unrealized losses on fixed maturities and $63.4 million on equity securities, specifically regarding the perpetual preferred stocks of financial institutions.
- Fireside Bank Wind-down: Monitor the actual costs incurred against the estimated $14 million to $21 million restructuring range and the recovery of the loan portfolio given the sub-prime nature of the assets.
- Direct Response Integration: Assess the timeline for realizing the projected $30 million in annualized expense savings from combining Direct Response operations with Unitrin Direct.
- Liquidity Position: Review the utilization of the $325 million revolving credit facility (currently $105 million drawn) and the ability of insurance subsidiaries to pay dividends to the parent company.
- Reserve Adequacy: Evaluate the impact of favorable loss reserve development ($16.6 million in P&C) on future earnings, as such development is not guaranteed to recur.