KMPR

Business Context and Reporting Period

This summary covers the Form 10-Q filed by Unitrin, Inc. (parent company of Kemper Corp) for the quarterly period ended March 31, 2007. The company operates through six segments: Kemper Auto and Home, Unitrin Specialty, Unitrin Direct, Unitrin Business Insurance, Life and Health Insurance, and Consumer Finance. The filing includes unaudited condensed consolidated financial statements and management discussion.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by $15.6 million (2.1%) year-over-year. This was driven by a $9.5 million increase in Net Investment Income and a $10.9 million increase in Net Realized Investment Gains. These gains were partially offset by a $10.6 million decrease in Earned Premiums.
• Investment Gains: Net Realized Investment Gains rose to $22.5 million from $11.6 million, primarily due to the sale of a portion of the company's Northrop Grumman common stock holdings.
• Premium Trends: Earned Premiums declined to $603.2 million from $613.8 million. Decreases were noted in the Unitrin Business Insurance, Life and Health, and Kemper Auto and Home segments, while Unitrin Direct and Unitrin Specialty saw increases.
• Segment Performance:
  • Life and Health: Operating profit increased significantly ($13.1 million) due to higher investment income and lower benefits.
  • Unitrin Business Insurance: Turned a profit ($4.6 million) from a loss ($2.4 million) due to lower incurred losses and the exit from a commercial reinsurance program.
  • Unitrin Direct: Operating loss widened to $9.0 million from $2.7 million due to increased marketing expenses for growth initiatives.
  • Consumer Finance: Operating profit declined to $8.3 million from $13.2 million due to a higher provision for loan losses ($16.5 million vs. $11.6 million).

Outlook, Risks, and Unusual Items

• Accounting Changes: The company adopted FIN 48 (Accounting for Uncertainty in Income Taxes) on January 1, 2007. The initial application had no effect on Shareholders' Equity. The company also recognized the impact of SFAS No. 158 regarding its investee, Intermec, resulting in a $2.3 million reduction to equity.
• Strategic Alternatives: Management is exploring strategic alternatives for the Unitrin Business Insurance segment due to challenges in achieving economies of scale in a competitive environment.
• Acquisition: On March 23, 2007, the company entered into an agreement to acquire Merastar Insurance Company for approximately $45 million. The transaction is expected to close in Q2 2007.
• Reinsurance: Catastrophe reinsurance programs were updated effective January 1, 2007, and April 1, 2007, with increased coverage limits and premiums for certain segments.
• Capital Allocation: The company repurchased 766,800 shares of common stock for $35.3 million in Q1 2007. Approximately $311.9 million remains available under its revolving credit facility.
• Risks: Key risks include the severity of catastrophe losses, changes in reinsurance pricing, regulatory actions, and the adequacy of loss reserves.

Investor Verification Checklist

• Investment Portfolio: Verify the valuation and unrealized gains/losses on the significant Northrop Grumman holdings, which heavily influence quarterly earnings via realized gains.
• Reserve Adequacy: Review the "Loss and LAE Reserve Development" figures, particularly the shift in actuarial methodology mentioned for 2007, to assess the stability of future loss ratios.
• Unitrin Direct Viability: Monitor the trajectory of the Unitrin Direct segment, which is currently operating at a loss due to aggressive marketing spend; verify if this aligns with long-term profitability goals.
• Consumer Finance Quality: Analyze the rising provision for loan losses and the percentage of receivables past due in the Consumer Finance segment.
• Strategic Alternatives: Track any updates regarding the potential sale or restructuring of the Unitrin Business Insurance segment.