Kemper / Unitrin 2010 Form 10-K Summary
Business context and reporting period
The filing is Unitrin, Inc.’s Form 10-K for the fiscal year ended December 31, 2010, filed February 3, 2011. The company was a diversified insurer with property and casualty, life and health, and auto-finance operations. Its auto-finance subsidiary, Fireside Bank, was winding down. The supplied filing identifies the registrant as Unitrin, Inc.; it does not report under the Kemper Corp. name.
Financial performance and position
| Metric | 2010 | 2009 |
|---|---|---|
| Total revenues | $2,743.4 million | $2,933.4 million |
| Earned premiums | $2,289.4 million | $2,455.5 million |
| Net investment income | $327.6 million | $322.7 million |
| Net realized investment gains | $42.6 million | $24.6 million |
| Impairment losses recognized in earnings | $16.5 million | $50.4 million |
| Income from continuing operations | $183.8 million | $162.2 million |
| Net income | $184.6 million | $164.7 million |
| Operating cash flow | $58.5 million | $163.5 million |
| Year-end total assets | $8,358.5 million | $8,573.5 million |
| Year-end shareholders’ equity | $2,113.4 million | $1,917.6 million |
Net income increased about 12% year over year despite lower revenue and premiums. Management attributed the improvement principally to better Unitrin Direct and Fireside Bank results, lower investment impairment losses, and higher realized investment gains, partly offset by lower operating profit in Kemper, Unitrin Specialty, and Life and Health. Other comprehensive investment gains were $179.5 million, versus $233.7 million in 2009.
- Underwriting and claims: Continuing-operations catastrophe losses, net of reinsurance, were $78.1 million, up from $43.5 million in 2009. Total favorable property-and-casualty prior-year reserve development was $24.9 million, down from $80.9 million. Gross property-and-casualty reserves fell to $1,118.7 million from $1,211.3 million.
- Segment results: Kemper operating profit was $63.9 million, down from $86.2 million; its combined ratio worsened to 98.8% from 95.3%. Unitrin Specialty operating profit was $24.6 million, down from $30.5 million, and its combined ratio rose to 100.1% from 98.2%. Unitrin Direct narrowed its operating loss to $7.1 million from $12.6 million, but its combined ratio remained high at 110.1%. Life and Health operating profit was $154.0 million, compared with $168.5 million, including a $14.8 million goodwill impairment. Fireside Bank reported $24.6 million operating profit versus $1.6 million.
- Debt and liquidity: Notes payable were $609.8 million at year-end, including $250 million principal of new 6.00% senior notes due 2015 and $360 million principal of 6.00% notes due 2017; the $200 million 2010 notes were retired. The $245 million revolving credit facility was undrawn at year-end. Fireside Bank certificates of deposit declined to $321.4 million from $682.4 million. Parent cash and investments were $60.5 million; consolidated cash was $117.2 million.
- Capital returns: The company repurchased about 1.4 million shares for $34.4 million and paid $0.88 per share in dividends during 2010. On February 2, 2011, the board authorized a new repurchase program of up to $300 million.
Material changes versus prior periods
Earned premiums fell 6.8% in 2010, with decreases in all four insurance segments; auto-finance revenues fell $79.5 million as Fireside stopped originating loans. Operating cash flow dropped by $105.0 million. Investment impairment losses declined substantially, while realized gains increased. Catastrophe losses increased, and favorable reserve development was materially lower than in 2009. The fourth quarter produced $62.9 million of net income, versus $66.3 million a year earlier; fourth-quarter continuing-operations income was $61.5 million, versus $66.1 million.
Outlook, risks, contingencies, and unusual items
- No general consolidated earnings or revenue guidance is stated. Management expected Kemper premiums to decline in the near term; Unitrin Specialty expected policy counts to keep falling for several quarters before flattening in the second half of 2011; and Unitrin Direct expected premiums to continue declining in 2011, then remain relatively flat later in the year.
- Fireside Bank estimated approximately $190 million of loan collections in 2011 and expected positive bottom-line results. The company anticipated returning approximately $250 million of Fireside capital over several years, subject to regulatory approval. A requested $50 million dividend remained pending as of February 3, 2011.
- Health-care reform threatened Reserve National’s limited-benefit health insurance business. The company wrote off all $14.8 million of related goodwill in the third quarter after concluding the business was impaired.
- Fireside’s subprime auto portfolio was concentrated in California, and its orderly runoff depended on collections, loan losses, and deposit redemptions. Fireside was subject to an FDIC and California regulator consent order, including a minimum 15% Tier 1 capital-to-average-assets ratio and restrictions on dividends.
- Key insurance risks include catastrophe severity, reserve-estimation uncertainty, reinsurance availability and collectability, rate adequacy, litigation and changing regulation. The filing cites $59.8 million of discontinued-operation reserves for asbestos, environmental, and construction-defect exposures. The company reported pending catastrophe-related lawsuits, principally in Florida, Louisiana, and Texas, but said resolution was not expected to materially harm financial position; outcomes could still materially affect results in a period.
- Investments included $328.0 million in equity-method funds focused on distressed and mezzanine debt, with $146.4 million of unfunded investment commitments. The company also held $137.5 million of Intermec stock and disclosed interest-rate and equity-price sensitivity. Its fixed-maturity portfolio was nearly 95% investment grade.
- Favorable reserve development and investment gains are not assured to recur. Reserve estimates are sensitive to actuarial assumptions; a disclosed sensitivity analysis estimated a $73 million increase or decrease in Kemper auto reserves under specified development-factor changes.
Important facts for investors to verify
- Confirm the reporting-entity and name history: this filing is for Unitrin, Inc., not a 2010 filing under Kemper Corp.
- Review the complete audited statements and notes for cash-flow quality, debt terms, investment impairments, and the composition and valuation of reserves.
- Track catastrophe losses, prior-year reserve development, and the actuarial assumptions behind Kemper’s reserves.
- Monitor Fireside’s runoff, loan-loss experience, deposit maturities, consent-order compliance, and regulatory decisions on capital distributions.
- Assess the effects of health-care reform on Reserve National and whether the remaining Life and Health goodwill and business outlook are supportable.
- Check subsequent filings for actual 2011 segment performance, subsidiary dividends, the $50 million Fireside request, and execution of the new $300 million share-repurchase authorization.