Business context and reporting period
This is Unitrin, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2010. The filing identifies Kemper as an insurance segment and registered service mark; it is not a filing by an entity named Kemper Corp. Continuing operations comprised property and casualty, life and health insurance, and automobile finance. Fireside Bank was winding down its lending and deposit businesses.
Financial performance and condition
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenues | $673.8 million | $750.6 million | $2,053.1 million | $2,202.5 million |
| Income from continuing operations | $35.5 million | $61.0 million | $122.3 million | $96.1 million |
| Net income | $35.7 million | $62.1 million | $121.7 million | $98.4 million |
| Diluted net income per unrestricted share | $0.58 | $1.00 | $1.95 | $1.58 |
- Revenue and earnings: Nine-month revenue declined 6.8% year over year, while continuing-operations income increased 27.3%. Q3 revenue fell 10.2% and continuing-operations income fell 41.8%. Q3 results included a $14.8 million goodwill impairment charge related to Reserve National.
- Cash flow: Nine-month operating cash flow was $60.2 million, versus $140.1 million in 2009. Investing activities provided $287.0 million and financing activities used $341.3 million. Cash increased $5.9 million to $149.6 million.
- Balance sheet and liquidity: At September 30, total assets were $8,540.9 million, total liabilities $6,340.6 million, and shareholders’ equity $2,200.3 million. Fixed-maturity investments were $4,711.4 million. Notes payable were $561.9 million; the undrawn revolving credit facility provided $245 million of availability. Insurance reserves totaled $4,185.4 million.
- Debt subsequent to quarter-end: The $200 million 4.875% senior notes matured November 1, 2010. The company reported repaying them with $94.9 million of cash and investments and a $110 million borrowing under its credit agreement.
- Insurance margins: Nine-month combined ratios were 97.8% for Kemper, 98.9% for Unitrin Specialty, and 108.2% for Unitrin Direct. Q3 ratios were 97.9%, 98.2%, and 109.1%, respectively. Ratios below 100% indicate underwriting profit before investment income; Unitrin Direct remained above 100%.
Material changes versus the prior comparable period
- Nine-month continuing income improved, driven mainly by better Unitrin Direct, Fireside Bank and Unitrin Specialty results and lower investment impairment losses. Q3 continuing income declined as lower profits in Life and Health, Kemper, Unitrin Specialty and Unitrin Direct outweighed improvement at Fireside Bank and reduced impairment losses.
- Earned premiums declined to $1,727.8 million from $1,855.0 million over nine months, with declines across all four insurance segments. Automobile finance revenue fell to $79.9 million from $142.4 million as Fireside Bank ceased new lending.
- Nine-month net investment income increased to $242.5 million from $234.7 million, but Q3 net investment income fell to $79.9 million from $93.3 million, primarily reflecting lower returns from equity-method limited-liability investments.
- Investment impairment losses recognized in earnings decreased to $12.7 million from $49.2 million for nine months. Other comprehensive income was $224.8 million, substantially increasing accumulated other comprehensive income to $283.6 million from $58.8 million at year-end 2009.
- Fireside Bank’s loan receivables declined to $397.4 million from $660.8 million at year-end 2009; certificates of deposit declined to $409.2 million from $682.4 million. The loan-loss reserve was $60.0 million, or 13.1% of outstanding net loans.
- Unitrin repurchased 976,300 shares for $24.5 million during the first nine months and paid $41.1 million in dividends. Quarterly dividends were $0.22 per share in each of the first three quarters.
Outlook, commentary, risks and unusual items
- Management expected Kemper earned premiums to decline for several quarters as lower policy volume was partly offset by higher rates. Unitrin Direct expected premiums to keep declining for the next few quarters and then remain relatively flat through 2011; a web-portal partner’s exit was expected to make new sales through that portal minimal after Q4 2010.
- Fireside Bank management expected positive bottom-line results for Q4 2010 and the full year, estimated about $321 million in loan collections over the next 15 months, and expected capital ratios to remain well above regulatory requirements. A requested $50 million dividend to the parent required regulatory approval; approval was not assured.
- Reserve National’s sale process continued, but management concluded a near-term sale was not probable. Health-care reform and proposed minimum medical-loss-ratio rules could adversely affect the business; the company wrote off its $14.8 million of associated goodwill and cautioned that any sale might not recover the remaining carrying value.
- Catastrophe losses from continuing operations were $58.7 million for nine months and $16.4 million for Q3, compared with $49.9 million and $13.9 million, respectively, in 2009. Prior-year property and casualty reserve development was favorable by $19.1 million for nine months, versus $60.5 million in 2009; future development could be favorable or adverse.
- Risks include catastrophe frequency and severity, reserve-estimation uncertainty, investment-market and interest-rate movements, Fireside Bank loan collections and orderly wind-down, health-care reform, regulatory changes, and litigation. The company reported ongoing catastrophe-related lawsuits, including matters in Florida, Louisiana and Texas; it did not expect pending proceedings to materially harm financial position but could not rule out a material impact on period results.
- No formal consolidated earnings guidance was provided in the filing. Forward-looking statements were subject to the risks described above. Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer and security being analyzed: this filing is for Unitrin, Inc.; Kemper appears as a segment/brand.
- Track whether Reserve National’s sale proceeds, health-care reform exposure and remaining carrying value change; assess any further impairment risk.
- Monitor insurance pricing, policy counts, combined ratios, catastrophe losses and reserve development, especially Unitrin Direct’s above-100% combined ratio.
- Verify Fireside Bank’s collections, delinquency and loss-reserve trends, regulatory approval of the requested dividend, and progress of its wind-down.
- Review the post-quarter repayment of the 2010 notes, the resulting credit-facility borrowing, and any contemplated new debt issuance and capital contribution to United.
- Assess investment concentration and valuation risk, including the $136.8 million Intermec position, illiquid limited-liability investments and sensitivity to market changes.