Business Context and Reporting Period
This summary covers the Form 10-Q filed by Unitrin, Inc. (doing business as Kemper Corp) for the quarterly period ended September 30, 2009. The company operates through five segments: Kemper, Unitrin Specialty, Unitrin Direct, Life and Health Insurance, and Fireside Bank. A significant strategic shift occurred during the period with the decision to exit the automobile finance business via the wind-down of Fireside Bank operations.
Key Financial Metrics
| Metric | Nine Months Ended Sept 30, 2009 | Nine Months Ended Sept 30, 2008 | Three Months Ended Sept 30, 2009 | Three Months Ended Sept 30, 2008 |
|---|---|---|---|---|
| Total Revenues | $2,202.5 million | $2,117.5 million | $750.6 million | $679.9 million |
| Net Income | $98.4 million | ($19.0) million | $62.1 million | ($45.2) million |
| Income from Continuing Ops | $96.1 million | ($11.9) million | $61.0 million | ($49.6) million |
| Diluted EPS (Unrestricted) | $1.58 | ($0.30) | $1.00 | ($0.72) |
| Net Investment Income | $234.7 million | $191.0 million | $93.3 million | $63.7 million |
| Net Impairment Losses | ($49.2) million | ($98.9) million | ($14.5) million | ($72.1) million |
| Total Assets | $8,757.8 million | $8,818.8 million | N/A | N/A |
| Total Liabilities | $6,864.6 million | $7,170.2 million | N/A | N/A |
| Shareholders' Equity | $1,893.2 million | $1,648.6 million | N/A | N/A |
| Cash and Cash Equivalents | $101.9 million | $184.2 million | N/A | N/A |
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a significant improvement from a net loss in 2008 to net income in 2009. Income from Continuing Operations increased by $108.0 million for the nine-month period, driven by higher segment net income and significantly lower net impairment losses recognized in earnings.
- Investment Performance: Net investment income increased by $43.7 million (nine months) primarily due to higher returns from limited liability investment companies and partnerships. Net impairment losses decreased by $49.7 million compared to the prior year.
- Segment Performance:
- Kemper: Operating profit improved to $61.1 million from a loss of $12.6 million, aided by lower catastrophe losses and favorable reserve development.
- Life and Health: Operating profit surged to $118.9 million from $60.0 million, driven by higher investment income and lower catastrophe losses.
- Fireside Bank: Operating loss narrowed to $1.5 million from $27.2 million as the bank suspended new lending and began an orderly wind-down.
- Catastrophe Losses: Catastrophe losses from continuing operations were $49.9 million for the nine months ended Sept 30, 2009, compared to $146.4 million in 2008. No major hurricanes impacted the company in the first nine months of 2009, whereas three major hurricanes (Dolly, Gustav, Ike) impacted results in 2008.
- Acquisitions: The company completed the acquisition of Direct Response Corporation in February 2009 for $201.6 million, which is included in the Unitrin Direct segment.
Guidance, Outlook, and Risks
- Fireside Bank Exit: On March 24, 2009, Fireside Bank suspended all new lending and ceased opening new certificate of deposit accounts. Management expects the segment to record approximately break-even results for the fourth quarter of 2009 and anticipates an orderly wind-down over several years.
- Unitrin Direct Outlook: The segment expects to be approximately break-even for the full year 2010. Management is implementing rate increases and reducing marketing spend to improve underwriting profitability, which may lead to a decline in earned premiums in 2010.
- Liquidity and Capital: On October 30, 2009, the company entered into a new three-year, $245 million revolving credit agreement, replacing the expiring 2010 agreement. Management expects to maintain the current quarterly dividend of $0.20 per share.
- Key Risks:
- Healthcare Reform: The Reserve National reporting unit (Life and Health segment) specializes in limited benefit medical and Medicare supplement products, which could be impacted by national healthcare proposals.
- Legal Proceedings: The company faces significant litigation related to property damage from catastrophes (hurricanes) in Florida, Louisiana, and Texas.
- Investment Volatility: Results are sensitive to the performance of investments in limited liability investment companies and partnerships, which can introduce volatility to net investment income.
Investor Verification Checklist
- Fireside Bank Wind-down Progress: Verify the rate of decline in automobile loan receivables and certificates of deposits against the projected exit timeline.
- Reserve Adequacy: Review the development of property and casualty insurance reserves, particularly regarding prior-year catastrophe losses (e.g., Hurricanes Ike and Gustav) and the impact of legal proceedings.
- Investment Portfolio Quality: Assess the composition of the fixed maturity portfolio, specifically the exposure to municipal bonds and the status of unrealized losses on below-investment-grade securities.
- Direct Response Integration: Monitor the integration of Direct Response operations and the effectiveness of rate increases in improving the Unitrin Direct segment's combined ratio.
- Dividend Sustainability: Confirm the ability of insurance subsidiaries to pay dividends to the parent company given regulatory restrictions and the capital needs of the wind-down process.