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 June 30, 2006. The company operates through six segments: Unitrin 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
| Metric | Six Months Ended June 30, 2006 | Six Months Ended June 30, 2005 |
|---|---|---|
| Total Revenues | $1,532.7 million | $1,538.1 million |
| Net Income | $135.4 million | $146.1 million |
| Diluted EPS | $1.97 | $2.10 |
| Net Cash Provided by Operating Activities | $167.2 million | $202.7 million |
| Total Assets | $9,164.1 million | $9,198.3 million (Dec 31, 2005) |
| Total Debt Outstanding | $504.1 million | $503.6 million (Dec 31, 2005) |
| Shareholders' Equity | $2,138.7 million | $2,157.7 million (Dec 31, 2005) |
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased by $10.7 million (7.3%) for the six months ended June 30, 2006, compared to the same period in 2005. This was primarily driven by a significant reduction in Net Realized Investment Gains, which fell from $45.7 million in 2005 to $20.6 million in 2006. The 2005 figure included a $39.4 million gain from real estate sales not present in 2006.
- Revenue Composition: While Total Revenues were relatively flat, Consumer Finance Revenues increased by $13.5 million due to higher loan volumes, and Net Investment Income rose by $10.0 million due to higher yields. These gains were offset by a slight decrease in Earned Premiums ($0.4 million).
- Catastrophe Impact: The company recorded $3.6 million in adverse development related to Hurricane Katrina (2005) for the six months ended June 30, 2006. This resulted from increased estimates of direct losses and indirect residual market losses. Hurricane Rita losses were fully offset by reinsurance recoveries.
- Segment Performance:
- Unitrin Kemper Auto and Home: Operating profit increased significantly ($16.8 million) due to favorable loss reserve development and lower expenses.
- Unitrin Business Insurance: Operating profit decreased ($9.9 million) due to higher insurance expenses from restructuring and system migration, and higher catastrophe losses.
- Unitrin Direct: Reported an operating loss of $2.3 million, compared to a profit of $0.9 million in 2005, driven by higher marketing expenses and adverse loss development.
Guidance, Outlook, and Risks
- Reinsurance Changes: Effective July 1, 2006, the company renewed its catastrophe reinsurance program for the Unitrin Kemper Auto and Home segment on terms substantially different from the prior year, with higher retentions and lower coverage percentages, resulting in a higher annual premium cost ($19.5 million vs. $11.1 million).
- Reserve Variability: Management estimates that Property and Casualty Insurance Reserves could vary by approximately +/-15% based on historical development. Significant uncertainty remains regarding the ultimate cost of Hurricane Katrina losses, particularly in the Life and Health Insurance segment.
- Capital Resources: The company repurchased 639,700 shares of common stock for $29.2 million in the first half of 2006. It maintains a $325 million revolving credit facility with $311.9 million available. Management believes it has sufficient resources to maintain current dividend levels.
- Accounting Changes: The company adopted SFAS No. 123(R) effective January 1, 2006, using the modified prospective method. The incremental effect was not material. The company is also evaluating the impact of FIN 48 (Accounting for Uncertainty in Income Taxes), effective January 1, 2007.
Investor Verification Checklist
- Hurricane Katrina Reserves: Verify the stability of the $63.6 million loss estimate for the Life and Health segment and the potential for further adverse development.
- Investment Gains Volatility: Assess the sustainability of earnings given the heavy reliance on Net Realized Investment Gains in 2005 versus the lower levels in 2006.
- Reinsurance Adequacy: Review the new catastrophe reinsurance terms for the Unitrin Kemper Auto and Home segment to understand the increased retained risk exposure.
- Unitrin Direct Turnaround: Monitor the Unitrin Direct segment's ability to reverse its operating loss trend amidst increased marketing spend and adverse loss development.
- Restructuring Costs: Track the completion of restructuring and system migration in the Unitrin Business Insurance segment to confirm the expected decline in redundant costs in the second half of 2006.