Filing summary
Entity and period: The supplied metadata identifies KEMPER Corp, but this filing’s cover names Unitrin, Inc. as the registrant. It is an unaudited Form 10-Q for the quarter and six months ended June 30, 2010, filed August 2, 2010. Confirm the issuer and filing match before relying on this summary.
Unitrin’s continuing businesses were property and casualty insurance, life insurance, and automobile finance. Reserve National health insurance and former Unitrin Business Insurance activities were reported as discontinued operations. Fireside Bank was winding down lending and deposit-taking.
Key financial metrics
| Metric | Three months ended June 30, 2010 | Six months ended June 30, 2010 |
|---|---|---|
| Total revenues | $651.3 million, versus $729.9 million | $1,312.7 million, versus $1,385.7 million |
| Income from continuing operations | $37.5 million, versus $39.5 million | $85.8 million, versus $32.0 million |
| Net income | $37.8 million, versus $41.9 million | $86.0 million, versus $36.3 million |
| Net income per unrestricted share | $0.61, versus $0.67 | $1.38, versus $0.58 |
| Net investment income | $80.5 million, versus $92.9 million | $160.0 million, versus $138.6 million |
| Operating cash flow | Not presented quarterly | $50.0 million, versus $86.9 million |
All comparisons are with the corresponding 2009 period. Earned premiums were $545.8 million in the quarter and $1,095.5 million year to date, down from $594.5 million and $1,175.7 million, respectively. Automobile finance revenues also fell substantially as Fireside Bank exited the business. No single consolidated operating-margin measure is provided; segment combined ratios include 97.7% for Kemper, 99.2% for Unitrin Specialty, and 107.7% for Unitrin Direct in the first half of 2010.
At June 30, total assets were $8,507.9 million, total liabilities $6,439.7 million, and shareholders’ equity $2,068.2 million. Cash was $97.9 million. Notes payable totaled $561.8 million, including $199.9 million of 4.875% senior notes due November 1, 2010. The $245 million revolving credit facility was undrawn. Net cash decreased $42.9 million in the first half; investing activities provided $118.5 million and financing activities used $211.4 million.
Material changes versus prior comparable periods
- First-half net income rose to $86.0 million from $36.3 million, primarily reflecting higher segment operating profit and substantially lower investment impairment losses. Impairment losses recognized in earnings were $8.1 million versus $34.6 million.
- Second-quarter continuing income declined to $37.5 million from $39.5 million. Management attributed the decline mainly to lower Career Agency, Kemper, and Unitrin Specialty operating profit, partly offset by improvement in Unitrin Direct and Fireside Bank and lower impairment losses.
- First-half net investment income increased by $21.4 million, with equity-method limited-liability investment income of $22.8 million versus $4.5 million. In the second quarter, net investment income fell $12.4 million, primarily as income from those investments declined to $13.4 million from $24.8 million.
- Continuing-operations catastrophe losses were $42.3 million before tax for the first half, versus $36.0 million; second-quarter losses were $28.3 million versus $21.7 million.
- First-half operating cash flow decreased by $36.9 million. The balance-sheet investment portfolio’s unrealized gains increased, contributing to accumulated other comprehensive income of $163.0 million, up from $58.8 million at year-end 2009.
Outlook, commentary, risks, and unusual items
- Fireside Bank: Management expected loan receivables and certificates of deposit to decline significantly in the second half of 2010 and expected positive bottom-line results. The bank had stopped new lending and new deposit accounts; it may seek regulatory approval for an approximately $50 million dividend in the second half, but approval is not assured. Its Tier 1 capital to average assets ratio was 26.4%, above its 15% regulatory agreement threshold.
- Unitrin Direct: Management expected earned premiums to continue declining for three quarters, then begin sequential growth as new products gain traction and marketing spending increases in 2011. The segment remained above a 100% combined ratio in the first half, indicating underwriting losses before investment income.
- Reserve National: A proposed sale agreement in principle was not finalized; negotiations ended in April, and an adviser was retained to identify another buyer. The company said goodwill was recoverable based partly on preliminary, non-binding buyer indications, but gave no assurance of a sale or full goodwill recovery. Health-care reform could adversely affect the business.
- Insurance reserves and legal exposure: Property and casualty reserves were reduced by $16.0 million for favorable prior-year development in the first half, compared with a $42.4 million reduction in 2009. Management cautioned that future development may be favorable or adverse. The company also described significant catastrophe-related litigation, including cases in Florida, Louisiana, and Texas; outcomes and potential losses are uncertain.
- Investments and market risk: The company reported $35.5 million of unrealized losses on fixed-maturity and equity securities, including $23.5 million on positions held at least 12 months, and concluded the declines were temporary. 95.0% of fixed maturities were investment grade. Investments include illiquid or valuation-sensitive private funds and distressed/mezzanine exposures; the company had $56.5 million of future contribution commitments to Goldman Sachs-sponsored entities. A sensitivity scenario showed a $320.3 million adverse fair-value effect on fixed maturities from an instantaneous 100-basis-point rate increase.
- Debt, regulation, and other items: The $200 million senior-note maturity in November 2010 was a near-term funding consideration; management said it believed it could repay the notes from existing resources. The filing discusses potential effects of the newly enacted Dodd-Frank Act and evolving insurance and banking regulation. Unitrin repurchased 543,600 shares for a reported $14.0 million during the second quarter and paid $0.22 per share in each of the first two quarters.
Important facts for investors to verify
- Confirm the registrant identity: this source is a Unitrin, Inc. filing, notwithstanding the KEMPER Corp request metadata.
- Review the full segment results and the drivers of the second-quarter decline, especially investment returns and catastrophe losses.
- Assess liquidity and the November 2010 note repayment, including availability and covenant headroom under the revolving facility.
- Track Fireside Bank’s runoff, deposit redemptions, loan-loss reserve adequacy, capital, and any regulatory dividend approval.
- Verify progress on a Reserve National sale and the support for its reported goodwill recoverability.
- Monitor claims development, catastrophe litigation, investment valuation and liquidity, and the regulatory effects identified in the filing.